What's the straight dope on crowdsourcing? Is it really illegal in The USA?

The company that runs one of my favorite video games is currently running a crowdsourcing fundraiser that will allow people to become part owner in the company. Reading the companies pitch, however, reveals that this opportunity is not available to people in the USA, Canada, or Japan. Why would the chance to buy ownership in a company be illegal? Is there some dangers involved in the practice that has led to these governments outlawing the practice? This particular company is based in the UK and I can attest that it’s not some kind of fly by night operation.

Because they are selling an investment, and that is heavily regulated to ensure the money you invest is handled correctly.

Only recently did the FTC pass rules allowing crowdsourcing at all, and no doubt there are onerous restrictions and various costs in order to comply.

See here : https://www.ftc.gov/news-events/audio-video/video/fintech-series-crowdfunding-peer-peer-payments-part-2

Someone may not understand the risks involved since it’s an investment transaction that is not made under SEC regulations.

“Crowdfunding” as it’s called in the U.S. is legal here. SEC rules permitting companies to raise money from the general public became operative in 2016.


The trick is that there are very specific rules for a company raising money this way.


I’m not an expert on the British equivalent of crowdfunding rules but my guess is that it’s somewhere between difficult and impossible to comply simultaneously with both U.S. and British rules for the same offering. For example, U.S. crowdfunding offerings must all be made on a U.S.-registered funding portal or by a U.S.-registered broker-dealer. If the British authorities require a British-registered funding portal, at the very least, you would need to use a funding portal that was registered in both countries to make the offering available in both countries. There might not be any funding portals registered in both countries.

If the company can raise enough money from investors outside the U.S, Japan and Canada, it might not be worth the hassle of complying with those countries’ laws to add a few more investors.

a preorder of a yet undeveloped game or product on kickstarter vs. an ownership stake in a company are very different things.

It depends on what the punter is getting in return for the amount they subscribe.

If what the promoter is offering is company securities (“allow people to become part owner in the company”) then, yeah, the selling of securities to the public is a highly-regulated activity, and the promoter may not care to comply with the regulatory requirements in one or more markets, so he won’t sell to subscribers in those markets.

If all the promoter is offering is, in effect, advance purchase of some gizmo still in development, or some product whose manufacture will be financed with the subscribers’ funds, that’s a whole different regulatory ballgame. You’re not soliciting investment in securities, you’re selling consumer products.