"Use of Proceeds" and Kickstarter

You know that "Use of Proceeds" section you see in IPO prospectuses and formal private placement memos?

Jay Parkhill asked me an interesting question the other day: could a group raising funds for a project on Kickstarter use, say, $5,000 of the amount raised toward expenses of corporate organization? Why not, I reacted, as long as they told folks that would be one purpose of the money.

I was thinking of a "Use of Proceeds" kind of standard, where disclosure-trumps-all, but it turns out my answer for this hypothetical was wrong.

Here's what I found from a quick check of the Kickstarter terms:

"1. Funding for projects only. A project has a clear goal, like making an album, a book, or a work of art. A project will eventually be completed, and something will be produced by it. A project is not open-ended. Starting a business, for example, does not qualify as a project."

In a sense, Kickstarter imposes a substantive standard, rather than a disclosure standard: you don't have discretion over what the funds are for; they MUST be dedictated to a stated project (no "future [unspecified] acquisitions" or "general working capital" buckets!).

By contrast, the equity crowdfunding exemption that is Title III of the JOBS Act will require issuers to disclose:

"a description of the stated purpose and intended use of the proceeds of the offering sought by the issuer with respect to the target offering amount."

That sounds more like the "Use of Proceeds" paradigm of flexibility that Jay and I are used to.

By the way, I don't think any invidual is going to be able to raise funds under the equity crowdfunding exemption and form a company after that fact. The legislation says the exemption will only apply to issuers "organized under and subject to the laws of a State or territory of the United States or the District of Columbia."