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Are You Smug Enough to Run a Public Benefit Corporation?

By Internet Lawyer
public benefit corporation

Should your Internet company become a public benefit corporation?

There’s a lot of buzz generated by Kickstarter’s decision to reincorporate in Delaware as a public benefit corporation. In the tech community and the media, it’s being heralded as the equivalent of Mother Teresa’s founding of the Missionaries of Charity.

Before you know it, those Silicon Valley orphans will have their bellies full of wholesome Kickstarter organic non-GMO vegan meals…or something like that.

A Public Benefit Corporation is a Socialist Entity

Whether your Internet business is a privately held corporation or a limited liability company (LLC), those who run the entity have a fiduciary duty to the business’ equity owners (e.g. corporate shareholders, LLC members, etc.).

If you’re a capitalist, you’ll understand that this means focusing on building the company’s value and profits for its owners.

In contrast, being a public benefits corporation lets those who run the company avoid liability for using revenues to pursue other goals. For example, Kickstarter’s new charter empowers the crowdfunding venture to spend money on the arts, “invest in green infrastructure” regardless of the cost, and to fight “systemic inequality” on behalf of anyone the company’s management feels is oppressed.

Reading the charter, it provides enough wiggle room for Kickstarter’s management to lobby Congress to ban fossil fuels or to pay for Bruce Jenner’s “sex change” operation to become Caitlyn Jenner in support of transgender equality.

Is a Public Benefit Corporation Right for You?

Let’s cut to the chase.

Converting your Internet company to a public benefit corporation probably makes sense if:

  • You’re a pretentious jerk who likes to pretend you’re better than other people because you’re “socially responsible” or “environmentally conscious.”
  • You plan to mismanage your company’s assets to support pet causes that have nothing to do making a profit for the business’ owners.
  • You majored in Peace Studies instead of Business in college.

What if you want to support charitable causes with your Internet business?

Perhaps you should consider following the path of Apple’s Steve Jobs. During his life, he focused on building up Apple into a very profitable company rather than turning it into some type of socialist experiment at the expense of shareholders.

However, as a successful entrepreneur, Jobs gave away a fortune to various charities during his lifetime from his own assets. He didn’t cripple Apple’s growth by looting it for a “public benefit.”

Was Becoming a Public Benefit Corporation the Right Move for Kickstarter?

Who knows?

But it certainly isn’t the right move for 99.99% of Internet business owners to make with their ventures…if building a profitable company is your primary goal.

Talk with your Internet lawyer and accountant if you’re interested in pursuing the idea. However, chances are they’re going to tell you to pass on the public benefit corporation fad.

Texas Attorney General Ken Paxton Indicted for Alleged Tech Securities Fraud

By Internet Lawyer
texas attorney general ken paxton indicted

Attorney General Paxton was indicted for alleged securities law violations

When a client starts talking about raising funds for an Internet startup by selling equity, it’s time for a reality check because of federal and state securities laws.

Quite simply, you can’t run around selling stock in your company without dotting a lot of legal i’s and crossing regulatory t’s. And you can’t pay commissions to your buddies for bringing investors to you.

Securities law is so complex that even most lawyers avoid it like the plague.
Which makes it all the more interesting that Texas Attorney General Ken Paxton has just been indicted by a grand jury on charges related to his alleged solicitation of investors for tech company Servergy, Inc. The three felony indictments accuse him of securities fraud and failing to register with the State of Texas to sell securities.

I don’t know if Attorney General Paxton violated the law. Some call the charges a political witch hunt. Others say he crossed the line.

Regardless of what did or did not happen, the important thing to learn from Paxton’s predicament is that you have to be extremely careful when raising funds for your tech startup. If you’re selling equity, get a securities lawyer on board to advise you before you even solicit investors.

For many entrepreneurs, the safer (and cheaper) course of action would be to do crowdfunding through sites like Kickstarter and IndieGoGo.

Disclosure: I dealt with Paxton’s office on an unrelated matter last year when he was a State Senator, and I voted for him when he ran for Texas Attorney General.

Internet Law News: Kickstarter Crowdfunding Campaign Nailed by FTC

By Internet Lawyer
kickstarter crowdfunding

FTC cracks down on dishonest Kickstarter crowdfunding campaign

The U.S. Federal Trade Commission just cracked down on alleged deceptive trade practices in a Kickstarter crowdfunding campaign.

According to the FTC, funds were raised for a project to produce a board game. However, the fundraiser never delivered the rewards he promised to his financial backers and he didn’t offer refunds either. Instead, he spent the money on personal expenses and other items unrelated to the board game.

It’s important to note that there was no allegation of wrongdoing by Kickstarter. The FTC went after the fundraiser.

Under the settlement reached with the FTC, the fundraiser “is prohibited from making misrepresentations about any crowdfunding campaign and from failing to honor stated refund policies. He is also barred from disclosing or otherwise benefiting from customers’ personal information, and failing to dispose of such information properly. The order imposes a $111,793.71 judgment that will be suspended due to [his] inability to pay. The full amount will become due immediately if he is found to have misrepresented his financial condition.”

Lesson to learn? If you’re going to crowdfund to raise money, be sure to honor your commitments. Taking the money and spending it on yourself is a bad idea from both a legal and ethical standpoint.

Related reading: Crowdfunding Project Creator Settles FTC Charges of Deception

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