Ownership, whether of a car, a home or a business, is thought by many to be one of the key ingredients in that tough-to-define and oft-evolving concept known as The American Dream. However, earlier this month an innovative plan utilizing social media that would have given Americans a chance to own their own little piece of a well-known national brand was nixed by the Securities Exchange Commission (SEC). Why? The SEC determined that a social network-driven initiative to buy brewer Pabst failed to meet the statutory standards for a public offering. According to The Wall St. Journal's legal blog:
"Two advertising executives on (June 8) reached a settlement with securities regulators over a Web site that purported to raise $300 million via ”crowdsourcing” on Facebook and Twitter to buy Pabst Brewing Co., the maker of Pabst Blue Ribbon, Lone Star, Colt 45 and other beers.
The Securities and Exchange Commission said Michael Migliozzi II and Brian William Flatow agreed to a cease-and-desist order after they allegedly failed to register their offering before seeking to sell shares to the public. They did so without admitting or denying wrongdoing."
For those unfamiliar with the details of the Pabst sale, crowdsourcing or the role of the SEC, allow us to elaborate. Migliozzi and Flatow noted that the brewer, Pabst, had been put on sale by the private charitable trust which currently owns it. The two ad execs saw an opportunity to buy a well-known brand (or conduct a social media experiment, or both depending on who is describing the facts) and created a website which advertised their intent to buy PBR. They also used social media, including Twitter and Facebook, to attract co-travelers, who they called 'pledgees' and 'investors' to their potential venture.
Speaks for itself...
The site, 'Thebuyabeercompany.com,' explained the execs' plan to potential pledgors; the first stage would be the gathering of pledges. After a sum of $300 million was pledged, the next step would be collecting and making a bid for the brewer.
What would pledgors receive for their efforts? According to the website (which has been restricted for obvious reasons, but whose main contents can be found in SEC documents), in the event that the threshold amount was reached, each investor would receive a 'crowdsourced certificate of ownership' and beer of an equal value to the amount invested. At least at that point, it would appear that a pledge of, say, $20 would get a potential investor a certificate and a few six-packs, but not necessarily an ownership stake in the brewer, in the event of a successful purchase.
Let us turn briefly aside from our timeline to say a few words about crowdsourcing, like so many other inventions of the internet-age, a rather recent phenomenon. According to a June, 2006 Wired article by Jeff Howe, The Rise of Crowdsourcing, it started as a way for companies to outsource projects to crowds, often anonymously, as a means to tap into alternative resources. Since that time, the term has grown to broadly define more web-based interactions.
At this point, the term could be defined as anything from the e-outsourcing activities that it originally described to the broader utilization of social media to bring together disparate individuals for any common cause. In the case at point, that cause was buying a brewer. From the start, and like so many creations of the web world, crowdsourcing was often more about collaboration than payment; the pleasure of problem solving placed squarely above pecuniary interests.
In this vein, and getting back to the main story, our ad-execs hoped to tap into this desire to be a part of a collaborative group. With their website, which was promoted by various social media, they proved successful at doing so. Perhaps even more successful than they had originally supposed. From November 2009, when the website was formed, to February 22, 2010, the two managed to obtain over $200 million in pledges.
This caused them to pursue their options a bit more seriously, and they went as far as exploring the formation of a takeover vehicle. Forming such a corporate structure created the potential outcome that, rather than receiving a fancy certificate and a few six packs, pledgors would receive actual shares. It was probably also the point where the Rubicon was crossed as far as the SEC was concerned. From SEC documents (also linked to above; citations omitted):
- Securities Act Section 5(c) makes it unlawful for any person, directly or indirectly, to make use of any means or instrument of transportation or communication in interstate commerce to offer to sell any security unless a registration statement has been filed with the Commission. Scienter is not an element of a Section 5 violation.
- Section 2(a)(3) of the Securities Act defines "offer to sell," "offer for sale," and "offer" to include, "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value."
- The Respondents made use of the jurisdictional means to effect an offering of securities. (Ed. note: in this case, this statement refers to their use of the internet as a tool of interstate commerce)
- The Respondents failed to register the offering with the Commission and there was no applicable exemption from registration.
- Since the offer of the securities was not registered with the Commission, nor exempt from registration, Migliozzi and Flatow violated Section 5(c) of the Securities Act.
In sum, using the internet (which crosses state boundaries, thus triggering the rules for national securities laws in addition to local requirements) to offer securities was in violation of statutory securities laws.
So, the execs put together a plan, potentially as a social experiment initially, which quickly grew into something more and violated securities laws. Aside from pure statutory issues, was this such a bad thing? Obviously there are varying opinions. The SEC, for one, believes it was. The SEC has a clear mandate to regulate offerings, and it is pretty clear that the situation here became a potential offering when the ad men considered issuing shares, if not sooner. There are compelling interests in ensuring that the investing public is not subjected to unregulated offerings.
However, there was clearly no nefarious intent about the would-be beer barons. Additionally, the cool-factor of the plan is unmistakable. One beer industry insider we spoke to summed up this side of the coin perfectly (while giving a nod to the idea that the potential offerors didn't handle the situation perfectly):
"It was an interesting idea to stretch the uses of social media this way. With a brand like Pabst - and its grassroots resurgence of late - it seems like using social media means was the perfect avenue to take the company over. They just forgot a few phone calls and filings."
As it is difficult to completely match up the spirit of the law with the actual facts in this case, perhaps focusing on the actual results rather than the right or wrong of the situation is the more productive exercise.
In the end, it is probably for the best that the SEC stepped in when it did. Takeovers occurring via the medium of social media are takeovers nonetheless, and it is important to the functioning of the broader financial system that its participants believe that all transactions are on the up and up (a growing body of evidence from insider trading cases notwithstanding). Nonetheless, we would like to tip our caps to Messrs. Flatow and Migliozzi for coming up with one of the best intersections of social media and finance we have personally seen; that they also unfortunately intersected with the law shouldn't take innovation points away from the duo.
We also think that the SEC deserves a nod for its rational treatment of the two perpetrators. Though it has a mandate to diligently protect the public against unauthorized offerings, by letting Migliozzi and Flatow off by signing a cease and desist order with no assignation of blame the SEC engineered an entirely reasonable outcome. As such, what was likely a set of honest mistakes made while trying to do something innovative and interesting is not being punished disproportionately while the public remains safe from the foamy perils of brewer ownership.
Meanwhile, if a recent trip to a bar with a disproportionate number of men in very skinny jeans and ironic graphic tee's is any indication, Pabst seems to be chugging along just fine as well. In the end, not a bad day at the office for all involved it would seem...