Is It or Isn’t It: Are Crowdfunding Donations Securities?

By Ryan Browne, Fall 2013 Student Intern

questionLast time you decided to spend a few minutes with me, dear reader, we were talking about the risk of being ripped off when donating to crowdfunding projects.  What went unanswered in that blog post could affect the protection offered to donors to crowfunding projects: are crowdfunding projects securities, and therefore subject to securities regulation?

First, here is a little background about securities regulation.  Securities regulations are only enforced if what is being sold is a security.  The Securities Act of 1933 and the Securities Exchange Act of 1934 both contain definitions of the term “security”, and courts have interpreted them in the same way.  The definition lists what are normally thought of as securities, such as stocks, bonds, futures and options.  The definition also includes the term “investment contract”, which the Supreme Court has defined, first in SEC v. W.J. Howey Co., as “an investment of money in a common enterprise with profits to come solely from the efforts of others.”  This allows regulation of investment sales that aren’t traditionally thought to be securities.  This definition has been used to regulate investments in orange groves and beaver breeding operations.

So are donations to sites such as Kickstarter and Indiegogo considered securities?  It doesn’t appear that they are.  Projects promoted on these sites don’t offer donors a share of any profits made from whatever project they are attempting to fund.  Promoters of the projects solicit money through promises of a copy of the actual product they are attempting to make, a thank you on their website or just the knowledge that you helped someone’s project succeed.  Donors to these projects do not receive equity in the companies that are attempting to raise money.  So donations taken on Kickstarter and Indiegogo haven’t been thought to be the selling of securities and are therefore not required to register with the SEC and make public filings.