June 9, 2011 3:33 am

SEC settles over social media fundraising

Two advertising executives used social networking websites Twitter and Facebook to secure pledges of $200m in an experimental effort to buy Pabst Brewing Company, a move US regulators say ran afoul of the law.

The Securities and Exchange Commission said the men violated the securities laws by failing to register their offering and disclose financial information about their company to potential investors.

Michael Migliozzi, 45, and Brian Flatow, 41, agreed to settle with the SEC under a cease-and-desist order, without admitting or denying wrongdoing. Steven Berkowitz, their lawyer, said the long-time friends used “this as an experiment in crowdsourcing and it worked”. He added: “It serves as a warning that doing something as innocuous as testing the water can constitute an act which is regulated.”

The case is the first time the SEC has taken action against individuals using social networking websites to raise money. Last year the SEC filed charges against two Canadians who used Facebook and Twitter to promote penny stocks.

The growth of social media websites presents a mounting challenge for regulators.

According to a presentation posted on the internet, Mr Flatow is quoted as saying their quest began with a tweet from Mr Migliozzi after he read that Pabst was up for sale. Mr Flatow tweeted back saying he was interested in buying the company and, according to the presentation, they decided it would be a “great opportunity to experiment with crowdsourcing”.

In November 2009, the two men created a website, BuyaBeerCompany.com, to solicit investors for its planned $300m bid for Pabst, which was on the block. They sought pledges and told people not to send money. In exchange for their pledge, they promised a certificate of ownership and beer equivalent to the amount of money pledged.

Within the first three weeks, pledges for $14.75m came into the website, according to the SEC. By February 2010, more than 5m pledges for $200m had flooded the site. Their effort attracted media attention and subsequently the SEC. But by April 2010, the social media experiment was shut down.

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