Sunday, January 6, 2013

Business in BJJ: Crowdfunding and For-profit Entities

Would love to hear from a securities attorney on this one, but some of the recent activities of a few BJJ-related companies has me a little suspect. I haven’t seen more than a couple, but it appears that some apparent for-profit companies have decided to use crowdfunding to raise capital to make…whatever it is they want to sell. I get it…after seeing someone rake in $1M, a buck at a time, the idea of doing likewise to get your fledgling BJJ company off the ground seems like a no-brainer. I’m a bit wary of the process for a couple of reasons…

Does it work?-Not going to call anybody out here, but the companies I have been watching, well, they aren’t exactly raking in the dough, and I think that’s because people would rather pay a few dollars extra for a great product than donate some change in the name of potential and a side of altruism. Potential funders have to be wondering…is this how it’s supposed to work? Isn’t crowd funding supposed to be for breathtakingly innovative startups, charities, political causes, community based art projects and the like? That brings us to…

Branding-How are customers (and potential customers) going to look at a brand after a crowdfunding campaign? It’s one thing if you’re making mouthguards and donating 80% of the proceeds to the Save the PuppyWhales campain. It’s another entirely if, well, you’re flexing your entrepreneurial muscle and want the public to do the heavy lifting–nothing inherently wrong with that, afterall, that’s how the stock market works, but that brings us to my third puzzlement.

Is it even legal?-Turns out this issue has come up before. In the world of crowdfunding, there’s this grey area where nobody’s 100% decided whether soliciting donations for a capitalistic endeavor constitutes a contract. If it does, well, your little project on IndieGoGo basically equates to an IPO and you and the SEC might need to have a conversation or two. I doubt our niche of BJJ is big enough to generate attention at the level of SEC vs. WJ Howey, but flying under the radar doesn’t equal flying legally.

So yeah…gonna be keeping an eye on this one.


Anonymous said...

Good Morning, Megan.

Securities are not my forte by any means, but I don't see how any of these "activities" pass a simple Howey Test. The enterprise in question is dependent on an independent party who has solicited funds under the guise and expectation of making a profit. By my perspective, any arrangement where someone asks me for cash for a chance to make more cash, without any tangible effort or input on my part, is a security. And as such falls under all the SEC oversees.

Again, this is not my area of expertise and the particulars are still foggy but it seems pretty cut and dry to me.


Megan said...

Natan...thanks so much for your input. I'm in no way a lawyer, but it just smells rotten. I doubt anyone will be coming after the companies in question, but SEC aside, the premise under which some of the companies are requesting funding is questionable.