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The Legal Regulation of U.S. Crowdfunding: An Organically Evolving Patchwork

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Legal Aspects of Crowdfunding

Part of the book series: Ius Comparatum - Global Studies in Comparative Law ((GSCL,volume 55))

Abstract

One must at first acknowledge the rapid growth of the crowdfunding market over the recent years, both within the United States and worldwide. With the conduct of diverse crowdfunding activities, various complex legal issues arose. While the laws and regulations in the United States endeavoured to keep pace, at both state and federal levels, with the diversity and evolution of crowdfunding businesses, there is at the date of this report no comprehensive legal framework encompassing crowdfunding as a whole. This report thus aims to shed some light on the existing legal framework in force in the United States and on some of the complex issues raised by crowdfunding activities.

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Notes

  1. 1.

    Belleflamme et al. (2014), p. 588, notably state that “Crowdfunding involves an open call, mostly through the Internet, for the provision of financial resources either in the form of donation or in exchange for the future product or some form of reward to support initiatives for specific purposes”.

  2. 2.

    Classification systems of this kind have been employed by Bradford (2012), Frye (2014), Groshoff (2014), Heminway (2016), and Mollick (2014).

  3. 3.

    Exemption for limited offers and sales without regard to dollar amount of offering, 17 C.F.R. § 230.506 (2017).

  4. 4.

    Securities Act of 1933, 15 U.S.C. §§ 77a-aa (2012).

  5. 5.

    Regulation A, 17 C.F.R. §§ 230.251-63.

  6. 6.

    Classes of Securities under this subchapter, Exempted securities, 15 U.S.C. § 77c(a)(11).

  7. 7.

    Intrastate offers and sales, 17 C.F.R. § 230.147.

  8. 8.

    Intrastate sales exemption, 17 C.F.R. § 230.147A.

  9. 9.

    Exemption from tax on corporations, certain trusts, etc., 26 U.S.C. § 501(a) (2012).

  10. 10.

    Exemption from tax on corporations, certain trusts, etc., 26 U.S.C. § 501(c)(3) (2012).

  11. 11.

    GoFundMe Terms & Conditions, available at https://www.gofundme.com/terms.

  12. 12.

    The guidelines, issued by the National Association of State Charity Officials and dated 14 March 2001, are titled “The Charleston Principles: Guidelines on Charitable Solicitations Using the Internet” and are available at http://www.nasconet.org/wp-content/uploads/2011/05/Charleston-Principles-Final.pdf.

  13. 13.

    Unfair methods of competition unlawful; prevention by Commission, 15 U.S.C. § 45(a) (2012).

  14. 14.

    Comm’r v. Duberstein, 363 U.S. 278 (1960).

  15. 15.

    As described in the article titled “7 Things You Should Know About Gift Tax: Which Gifts Are Taxable And What Can Be Excluded,” U.S. Tax Center, and available at https://www.irs.com/articles/7-things-you-should-know-about-gift-tax.

  16. 16.

    Charitable, etc., contributions and gifts, 26 U.S.C. § 170 (2012); Subchapter F—Exempt Organizations, 26 U.S.C. § 501-15 (2012); see also Battista (2015).

  17. 17.

    Please see for further details: “Crowdfunding Project Creator Settles FTC Charges of Deception: Defendant Spent Backers’ Money on Personal Expenses,” Federal Trade Commission (2015), https://www.ftc.gov/news-events/press-releases/2015/06/crowdfunding-project-creator-settles-ftc-charges-deception.

  18. 18.

    Please see for further details: “AG Makes Crowdfunded Company Pay for Shady Deal,” Washington State Office of the Attorney General (2015), http://www.atg.wa.gov/news/news-releases/ag-makes-crowdfunded-company-pay-shady-deal.

  19. 19.

    Gross income defined, 26 U.S.C. § 61 (2012); Determination of amount of and recognition of gain or loss, 26 U.S.C. §1001 (2012); see also Montemurro (2016) and Battista (2015).

  20. 20.

    Comm’r v. Duberstein, 363 U.S. 278 (1960); see also Battista (2015).

  21. 21.

    Definitions; promotion of efficiency, competition, and capital formation in, 15 U.S.C. § 77b(a)(1) (2012); Reves v. Ernst & Young, 494 U.S. 56 (1990).

  22. 22.

    Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 1947-48 (2010).

  23. 23.

    This report, issued by from the U.S. Government Accountability Office and dated July 2011, is titled “Person-to-Person Lending: New Regulatory Challenges Could Emerge as the Industry Grows,” GAO-11-613 and is available at http://www.gao.gov/assets/330/320693.pdf.

  24. 24.

    This report, issued by the U.S. Government Accountability Office and dated April 2017, is titled “Financial Technology: Information on Subsectors and Regulatory Oversight,” GAO-17-361, and is available at http://www.gao.gov/assets/690/684187.pdf.

  25. 25.

    Prohibitions relating to interstate commerce and the mails, 15 U.S.C. § 77e (2012).

  26. 26.

    Registration and regulation of brokers and dealers, 15 U.S.C. § 77o (2012).

  27. 27.

    Transactions on unregistered exchanges, 15 U.S.C. § 78e (2012); National securities exchanges, 17 U.S.C. § 78f (2012).

  28. 28.

    Title III—Crowdfunding, Pub. L. No. 112-106, §§ 301-305, 126 Stat. 306 (2012).

  29. 29.

    Jumpstart Our Business Startups Act, Pub. L. 112-106, 126 Stat. 306 (2012).

  30. 30.

    Exemption from State regulation of securities offerings, 15 U.S.C. § 77r (2012).

  31. 31.

    Exclusion of Crowdfunding Investors from Shareholder Cap, Pub. L. No. 112-106, § 303, 126 Stat. 306 (2012); Registration requirements for securities, 15 U.S.C. § 78l(g)(6) (2012).

  32. 32.

    Exemption for securities issued pursuant to section 4(a)(6) of the Securities Act of 1933, 17 C.F.R. § 240.12g-6 (2017).

  33. 33.

    Crowdfunding, Securities Act Release No. 9974, Exchange Act Release No. 76,324, 80 Fed. Reg. 71,388, 71,388 (Nov. 16, 2015).

  34. 34.

    Exempted transactions, 15 U.S.C. § 77d(a)(6)(C) (2012); Requirements with respect to certain small transactions, 15 U.S.C. §§ 77d-1(a)(1) & (2) (2012); Intermediaries, 17 C.F.R. § 227.300(a)(1) & (2) (2017); Registration of funding portals, 17 C.F.R. § 227.400 (2017).

  35. 35.

    Exempted transactions, 15 U.S.C. § 77d(a)(6)(A) (2012); Crowdfunding exemption and requirements, 17 C.F.R. § 227.100(a)(1) (2017).

  36. 36.

    Exempted transactions, 15 U.S.C. § 77d(a)(6)(B) (2012); Crowdfunding exemption and requirements, 17 C.F.R. § 227.100(a)(2) (2017).

  37. 37.

    Requirements with respect to certain small transactions, 15 U.S.C. §§ 77d-1(b)(1) & (4) (2012); Disclosure requirements, 17 C.F.R. § 227.201 (2017); Ongoing reporting requirements, 17 C.F.R. § 227.202 (2017); Filing requirements and form, 17 C.F.R. § 227.203 (2017).

  38. 38.

    Requirements with respect to certain small transactions, 15 U.S.C. §§ 77d-1(b)(2) & (3) (2012); Advertising, 17 C.F.R. § 227.204 (2017); Promoter compensation, 17 C.F.R. § 227.205 (2017).

  39. 39.

    Requirements with respect to certain small transactions, 15 U.S.C. §§ 77d-1(a)(3)-(9) (2012); Measures to reduce risk of fraud, 17 C.F.R. § 227.301 (2017); Account opening, 17 C.F.R. § 227.302 (2017); Requirements with respect to transactions, 17 C.F.R. § 227.303 (2017); Completion of offerings, cancellations and reconfirmations, 17 C.F.R. § 227.304 (2017); Conditional safe harbor, 17 C.F.R. § 227.402 (2017); Compliance, 17 C.F.R. § 227.403 (2017); Records to be made and kept by funding portals, 17 C.F.R. § 227.404 (2017).

  40. 40.

    Requirements with respect to certain small transactions, 15 U.S.C. §§ 77d-1(a)(10) & (11) (2012); Intermediaries, 17 C.F.R. § 227.300(b) (2017); Payments to third parties, 17 C.F.R. § 227.305 (2017).

  41. 41.

    Requirements with respect to certain small transactions, 15 U.S.C. §§ 77d-1(e) (2012); Restrictions on resales, 17 C.F.R. § 227.501 (2017).

  42. 42.

    Requirements with respect to certain small transactions, 15 U.S.C. § 77d-1(f) (2012); Crowdfunding exemption and requirements, 17 C.F.R. § 227.100(b) (2017); Disqualification provisions, 17 C.F.R. § 227.503 (2017).

  43. 43.

    Requirements with respect to certain small transactions, 15 U.S.C. § 77d-1(c) (2012).

  44. 44.

    Manipulative and deceptive devices, 15 U.S.C. § 78j(b) (2012); Employment of manipulative and deceptive devices, 17 C.F.R. § 240.10b-5 (2017).

  45. 45.

    Insignificant deviations from a term, condition or requirement of this part (Regulation Crowdfunding), 17 C.F.R. § 227.502 (2017).

  46. 46.

    Requirements with respect to certain small transactions, 15 U.S.C. §§ 77d-1(a)(1) & (2) (2012); Intermediaries, 17 C.F.R. § 227.300(a)(1) & (2) (2017); Registration of funding portals, 17 C.F.R. § 227.400 (2017).

  47. 47.

    Funding Portals of the Financial Industry Regulatory Authority, available at http://www.finra.org/industry/funding-portals.

  48. 48.

    Letter of Acceptance, Waiver, and Consent (No. 2016051563901) of the Financial Regulatory Authority, available at http://www.finra.org/sites/default/files/fda_documents/2016051563901_FDA_JG411996.pdf.

  49. 49.

    Exemption from State regulation of securities offerings, 15 U.S.C. § 77r (2012).

  50. 50.

    Cyan, Inc. v. Beaver County Employees Retirement Fund, 583 U.S. (2018).

  51. 51.

    General statement, § 230.901 (2017).

  52. 52.

    Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010).

  53. 53.

    Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 929P(b), 124 Stat. 1376, 1947-48 (2010); Sec. & Exch. Comm’n v. Traffic Monsoon, LLC, 245 F. Supp. 3d 1275 (D. Utah 2017).

  54. 54.

    Transfer to corporation controlled by transferor, 26 U.S.C. § 351(a); and Nonrecognition of gain or loss on contribution, 26 U.S.C. § 721 (2012); see also Battista (2015).

  55. 55.

    Transactions between partner and partnership, 26 U.S.C. § 707 (2012); see also Battista (2015).

  56. 56.

    Amendments of the Definition of Broker or Dealer in Securities, 81 Fed. Reg. 19086 (4 Apr. 2016), available at https://www.federalregister.gov/documents/2016/04/04/2016-07345/amendments-to-the-definition-of-broker-or-dealer-in-securities.

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  1. Rick Rose Distinguished Professor of Law, The University of Tennessee, College of Law, Knoxville, TN, USA

    Joan MacLeod Heminway

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  1. Joan MacLeod Heminway
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Correspondence to Joan MacLeod Heminway .

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  1. Université de Paris, Paris, France

    Caroline Kleiner

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Heminway, J.M. (2021). The Legal Regulation of U.S. Crowdfunding: An Organically Evolving Patchwork. In: Kleiner, C. (eds) Legal Aspects of Crowdfunding. Ius Comparatum - Global Studies in Comparative Law, vol 55. Springer, Cham. https://doi.org/10.1007/978-3-030-79264-0_10

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  • DOI: https://doi.org/10.1007/978-3-030-79264-0_10

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