by Kim Courtney
The popularity of using crowdfunding to start or grow a business has exploded in recent years, with 5.1 billion raised in 2013, over 3 times the 1.5 billion raised in 2011 (Crowdfunding's Popularity Surged in 2013, Laura Montini, Inc.com, February 7, 2014). Forbes defines crowdfunding as "the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet." (What is Crowdfunding and How Does it Benefit the Economy, Forbes.com, November 27, 2012). There are lots of crowdfunding websites out there, including some of the more popular ones like Kickstarter, Indiegogo, GoFundMe, RocketHub, FundRazr, and Crowdfunder. These sites offer businesses of all sizes an opportunity to share their concept with the world, and invite the general public to support their efforts financially. This is beneficial to the overall economy, by increasing customer bases, generating revenue, and encouraging creativity, even in a struggling economy (Id.).
The Jumpstart Our Business Startups (JOBS) Act
In April of 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which had bipartisan support in Congress, and was supported by many technology companies (JOBS Act). Its stated goal is "To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies." (Id.). The Act eases certain securities regulations in an effort to encourage the funding of small businesses, which includes equity crowdfunding.
Titles II and III of the Act are the primary sections relevant to the crowdfunding and startup community, which attempt to lessen what can be burdensome securities regulations and provide greater access to capital for companies. Although the Act was passed in April of 2012, there are portions of it that have not yet gone into effect, despite deadlines put in place for 2014 that were not met. There is criticism from crowdfunding communities, because Title III would lessen regulations for equity crowdfunding, where a donor of funds to a campaign gets an equity interest in the company. The new deadline for implementation of Title III and IV is October 2015, which means that even if that deadline is met it would not go into effect until early 2016, to the frustration of many.
Food Industry Crowdfunding
There are a number of legal considerations if you plan to start a crowdfunding campaign for a food business. The first step is to review the rules of the particular site that you are using, to protect yourself from lawsuits from donors or the site itself. Rules will include things like limitations on products and services that can be offered, and types of rewards or incentives that are offered. For example, Kickstarter does not allow energy drink companies to run a campaign, and alcohol can not be offered as a reward. These sites tend to be very good about vetting campaigns for compliance with their rules, so if you miss something they are likely to let you know before you launch.
It is also a good idea to be careful with what and how you advertise your products or services, as well as the rewards offered. Be sure that you have the capacity to produce your offered rewards in a reasonable time period after the campaign ends, and that you will not end up in a financial loss.
One pitfall that is typical for campaigns for food products is the failure to comply with state and local food preparation, handling and distribution requirements. Any food products offered through crowdfunding must be made in a licensed commercial kitchen, and comply with all other labeling, packaging and other requirements. Although many companies don't comply with these laws and get away with it, it is a risk that is not recommended, because if someone gets sick from your product, you could get sued and be subject to significant financial loss. There may also be a potential for criminal charges, so it is frankly just not worth the risk.
Most cities and towns in Massachusetts have a state mandated quota for liquor licenses, which creates a false economy where those licenses can be bought and sold on the secondary market. Although Governor Deval Patrick expressed a desire to abolish this quota (Massachusetts' Archaic Caps on Liquor Licenses Need to Go, slate.com, by Alison Griswold, June 5, 2014), that did not happen before the transition in January 2015 to new Governor Charlie Baker. It will be interesting to see if the matter is pursued further by the new administration.
Currently most businesses have to purchase a liquor license in order to open a restaurant that serves alcohol in Massachusetts, with a few exceptions. Crowdfunding can be a great way to raise the funds to purchase a liquor license for a small food business that is just starting out. However, there are many legal considerations, such as disclosure and advertising rules.
Regardless of whether the funds contributed to a crowdfunding campaign to purchase a liquor license are considered merely a gift, or the donors are given equity in the company, the Alcoholic Beverages Control Commission (ABCC) requires each individual to be disclosed on the application for the license. Massachusetts General Laws Chapter 138, Section 15A states, "All applications for an original license under sections twelve and fifteen shall ... include a sworn statement by the applicant giving the names and addresses of all persons who have a direct or indirect beneficial interest in said license." (M.G.L. Ch. 138, § 15A, emphasis added). Section 12 refers to restaurant, hotel, brewer and tavern licenses, and section 15 refers to package store licenses. Most local authorities also require criminal background checks of those individuals. This disclosure requirement makes it prohibitive for many to collect funds through a crowdfunding site, many of which do not collect or verify such data.
As crowdfunding becomes more popular, the ABCC has begun to take notice, with the creation of an exception that will ease some of theses difficulties. In a November 2013 decision, the ABCC ruled that small amounts of funds donated through a crowdfunding platform could be listed on the application without the personal details of each individual donor. (In re: Homestead Hard Cider, LLC d/b/a Homestead Hard Cider, ABCC Decision, November 20, 2013). This new exception requires the amounts to be small enough that the Commission considers them to be "de minimus". In this particular case donations did not exceed $500, so it will be interesting to see how the ABCC will decide in future cases involving slightly larger donations.
By Kim Courtney, Esq., Courtney Law, www.KimCourtneyLaw.com.
Copyright Kim Courtney 2015