Crowdfunding law is about to become the next hot practice area // Opinion

Crowdfunding whale by Byron Eggenschwiler
Faskens partner May M. Cheng on the case for building your practice around crowdfunding law

By May M. Cheng

On Tuesday September 30th, 2014

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For the young (and even the not-so-young) lawyers looking to build a brand and develop a recession-proof practice in this bleak economy, I have two words for you: crowdfunding law. If you’re making the “she’s crazy” face, I understand. That’s exactly the reaction former Bay Street partner Ian Kyer got when he went to his firm’s management, more than 30 years ago, to ask if he could start a practice in “computer law.” Ian was a pioneer back then, and is now considered an IT law guru. Sometimes, to make a name for yourself, you have to be bold.

Crowdfunding started as a hip social experiment that took off when Kickstarter launched in 2009. Through the site, enterprising artists and makers appealed to the masses to chip in a few bucks towards a new venture that no bank would ever back. The experiment was successful. (Even Barack Obama used a similar model to transport himself into the Oval Office in 2008 by raising a record $750 million US — $600 million of which came from small donors through his website.) Today, crowdfunding has matured into a full-fledged industry worth up to $5 billion US. How did this happen? When the stock market crash hit in 2008, banks and investors stopped lending money to risky start-ups so readily. This capital crisis meant entrepreneurs had to find creative new sources of financing.

Some of the earliest examples involved filmmakers. Unable to convince studios to fund their movies, they turned to audiences, offering perks for cash. A $100-investor might receive an autographed movie poster, a ticket to a premiere and the DVD upon release. In cases where the movie isn’t made, the funds must be returned. But that can be a problem if the funds were spent before the plug was pulled. None of this was of much interest to lawyers, or regulators for that matter, since it was all small potatoes.

Then the amounts started to climb — see the now-famous example of the $5.7 million raised to produce a movie version of Veronica Mars, a cancelled TV show with a cult following. In Ontario, securities regulations allow companies to crowdfund up to $1.5 million in any 12-month period, still a tidy sum. And with higher investment comes higher risk — and a much greater chance of class action litigation if things go sour.

There is also the threat of fraud, which securities regulators are trying to reign in using public disclosure requirements. It’s a significant risk. Most of the transactions are internet-based and it’s not as if investors are provided with a detailed business plan and audited financial statements before they fork over their cash.

As crowdfunding secures its foothold as a mainstream investment vehicle, it won’t just be litigators who have all the fun. Tax and business lawyers will have to develop expertise in the field to advise entrepreneurs on how to position the investor contributions to best advantage. Meanwhile, IT lawyers are already hard at work, advising Kickstarter and other crowdfunding sites on how to set up their terms of use and licensing models.

It’s a field ripe for the picking. And the crowdfunding model will become even more interesting if it supplants traditional banking and capital investment institutions as the funding vehicle of choice. This will lead to institutional investors scrambling for a piece of the action.

Recently, I ran into Ian Kyer — the guru himself — and mentioned he would be making an appearance in my Precedent piece. “What a coincidence,” he said, laughing. He told me he had just co-authored an article on crowdfunding. Sounds like I’m not so crazy after all.

Byron Eggenschwiler


May M. Cheng is chair of the Toronto Intellectual Property Group at Fasken Martineau DuMoulin LLP and a supporter of crowdfunding for charitable causes through avaaz.org.
 
Illustration by Byron Eggenschwiler