SEC CTOs crowdsourced (or is it crowdsoused?) beer company offering

The SEC recently issued a cease and desist order against two advertising executives in the first enforcement action targeting the use of social media to offer securities.

Michael Migliozzi II and Brian William Flatow wanted to acquire the Pabst Brewing Company, but didn't have the $300 million they figured would be required. They created a Facebook page and sent Twitter messages directing potential investors to BuyaBeerCompany.com (it's been shut down, so I can't provide a hyperlink).

In the first stage, the two sought pledges and required that pledgors only supply an e-mail address, first name, last name, and pledge amount. If they received $300 million in pledges, the second stage would consist of collecting the pledges and purchasing Pabst. Initially, website visitors were asked to commit to pledging a minimum amount and to provide their name and e-mail address. If at least $300 million was pledged, each investor would receive a "crowdsource certificate of ownership" and beer worth the amount invested.

By February 2010, more than $200 million had been pledged by more than five million people. No money was actually collected.

Migliozzi and Flatow did not register their offering with the SEC, as required under section 5 of the Securities Act of 1933. The SEC release is silent on whether offering beer violated the act, but that would be stretching the definition of "security."

This is becoming more of an issue. I frequently see postings on LinkedIn soliciting investments. Not only is there a problem with failing to comply with local securities laws, there is the danger that almost any securities commission could consider the securities to be offered for sale in their jurisdiction because of the global reach of the networks. At most, companies seeking to use social media to raise capital should simply state that they are looking to engage a registered dealer to assist them to sell securities in X jurisdiction and say nothing more.