Crowdfunding Lawsuits

Crowdfunding Lawsuits

More and more people are using crowdfunding sites to start new business ideas and new business products. Some are even using websites like gofundme.com to get money for their cause, large or small. If you are thinking about using a crowdfunding website, keep in mind that litigation may follow. We’ve worked in areas of securities and business law and have seen good and bad come from these sites.

You should adopt reasonable procedures to ensure that the promoter includes in any communication the compensation disclosure required by Rule 205. You should implement procedures such as those previously described, which the SEC cites as examples in its Crowdfunding Release.

Second, in addition to this requirement under Rule 205 to take reasonable steps to ensure compliance with the promoter compensation rules, it is important to document the reasonable procedures that you have in place to ensure compliance with all aspects of Regulation CF and to document the steps you took in following those procedures. These procedures are especially important if you engage third-party promoters, as you will not have complete control over their conduct. You should have reasonable procedures to ensure that any third party speaking on the issuer’s behalf does not make any misrepresentations about the issuer or the offering.

The examples provided in the Crowdfunding Release of reasonable steps an issuer may take to ensure compliance with the compensation disclosure requirements are instructive in determining what reasonable steps you should take in ensuring compliance with all other requirements of Regulation CF. Thus, consider including provisions in the promoter’s contract, such as indemnification provisions, to provide some assurance that the promoter will comply with your instructions. You should also consider procedures to periodically monitor the promoter’s communications and to obtain confirmations from the promoter regarding compliance with your instructions and policies. Note, however, that it is imperative to follow your own procedures, as plaintiff attorneys like nothing more than to demonstrate that you violated your very own procedures.

Finally, you should not pay commissions, success fees or other transaction-based compensation to third-party promoters or to finders, even if the finder simply introduces prospective investors to the issuer and does nothing else. In the last several years the SEC staff has taken the position that a person receiving transaction-based compensation in connection with a securities transaction is an indication that the person must be registered as a broker-dealer.1 Thus, if the consultant/promoter or promoter is not a registered broker-dealer, you may pay a flat fee or other non-contingent fee for his/her promotional efforts; compensation should not be dependent on whether a sale occurs, nor may it be based on a percentage of the sales (i.e., a commission).

Crowdfunding Lawyer Free Consultation

When you need legal help with a crowdfunding matter, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

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