Is Crowdfunding Subject To The UCC?

In a recently published essay, Professor Joan Heminway asks “What is a Security in the Crowdfunding Era?” She observes:

Over the years, the lines between securities and financial products regulated under commodities, banking and insurance law have become blurred. Moreover, with the advent of the crowdfunding era, financial interests in business enterprises may look less like investment instruments commonly known as common stock or debentures, and more like loans, gambling bets, rights to consumable products or services or charitable or other nonprofit donations.

7 Oh. Entrepen. Bus. L.J. 335 (2013). As Professor Heminway points out, crowdfunders have adopted a variety of models. One of these is the “reward model” in which persons donating to a business are given something in return for their investment. See C. Steven Bradford, “Crowdfunding and the Federal Securities Laws”, 2012 Colum. Bus. L. Rev. 1, 16-20 (2012). The promoters try to avoid the application of federal and state securities laws by not rewarding donors with shares, debt, investment contracts or anything that might be characterized as a security. However, some may have overlooked the “risk capital” definition fashioned by California Supreme Court Justice Roger Traynor. See Silver Hills May Tarnish Crowdfunding and Are There Silver Hills In Other States? Some may also argue that there is no “sale” within the meaning of the securities laws. But see When is a Gift a Sale?

Leaving aside the securities laws, I wonder whether these promoters have given any thought to the possible application of the California Uniform Commercial Code to their transactions (for several years, I taught UCC Articles 2, 2A and 7). For example, could a donor have a viable breach of warranty claim against a promoter?

Division 2 of the California Uniform Commercial Code (we use the term “Division” rather than “Article”) applies to “transactions in goods”. Cal. Comm. Code § 2102. Many promoters offer rewards that are goods as defined in UCC Section 2105 such as books, DVDs, CDs or toys. Thus, the “donation” likely constitutes a “transaction in goods” and likely a “sale” within the meaning of UCC Section 2106.



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