August 05, 2008
One More Time: Selling fractional interests in your career or your work product will take you for a ride through securities law -- even if you are an "ant trading a mote of sand for a leaf or something"
Posted by Christine Hurt

Every once in awhile I just have to blog about the folks who escaped having to go to law school and take securities regulation and now are unaware that their activities are governed by a whole host of rules that they could never imagine.  (See, e.g., minor league baseball guy.)  So, people have these great ideas of how to finance their careers the same way start-up companies finance their launches, but unfortunately, these creative plans move them from "borrowing money from grandma and I only have to pay her back when I hit big" to "violating securities law."

Sarah Lawsky (guest-blogging at Concurring Opinions) emailed me this snippet from the Freakonomics blog about Tao Lin, a struggling young novelist who thought that his second novel would be finished faster if he quit his day job and instead paid for life's necessities by selling six shares worth 10% each of his future royalties from the novel.  He makes the pitch on his blog here

Several commenters on the Freakonomics blog point out that this ingenious scheme involves securities, which must be registered unless they or the transaction fall under an exemption, and the public nature of the offering pretty much makes an exemption impossible now.  Interestingly, Tao Lin's response (because his novel is going so well he seems to spend a lot of time commenting on blogs) is "I don't understand how I have engaged in securities fraud. . . .I'm like an ant trading a mote of sand for a leaf or something.  I'm an ant, I go home to my room.  I sit there alone.  Sometimes I read a Joy Wiliams short story.  What do you want from me?"  I guess this is a persuasive argument for a new exemption:  the issuer and the project are so small and worthless that it's not worth anyone's time.  Intriguing, but the disclosure of this fact will probably also hamper sales of the securities.  I don't want to buy shares in an ant, Mr. Lin.

There are some interesting issues raised by Mr. Lin's post, however.  One is funny, but the other is real.  OK, I'll give you the funny one first.  I think a stock joke in commercials, stand up, etc. is someone saying "Eighty-five percent of statistics are made up.  See, I just made that up."  Well, Mr. Lin must really like that joke.  I guess he believes that his pitch for investors should have some numbers in it.  Instead of actually revealing data such as previous sales of his first novel and two books of poetry, he instead just spews out some probabilities and numbers about the future: 

Based on sales of my first novel I project sales of my second novel to be 13000 after 24 months (if there isn't more mainstream attention than with my first novel). If there is more mainstream attention, and I think there is a 80-90% chance there will be, sales will be "considerably higher" I think. . . . If I ever have a book published that sells a lot more copies than any of my other books there is a 60-70% chance it will be my second novel, I think. . . . Film, reprint, and serial royalties are included. If my second novel is published in hardcover (60-70% chance, I think) my publisher will most likely sell the softcover rights to another publisher, and I get 50% of that, and you would get 10% of my 50%, which if the softcover rights sold for $30,000 would be $1500. I think shareholders should, at worst (based on a low projection and no fil/reprint/etc. sales), expect to begin making a profit on their investment within 32-40 months, after which they will "make profits every 6 months for the rest of their lives without having to do anything."

That definitely makes for more interesting reading that a typical offering memorandum -- where are the quotes from? OK, so the interesting point is the feedback from commenters. Let's say that this is a security. Our securities regime is set up so that registration or other protection is necessary to provide proper disclosure. Through the comments on Lin's blog and the Freakonomics blog, I've discovered many things. Now, these things are unsubstantiated, but so are many things in an S-1, although it is subject to antifraud rules. I would think these comments are subject to defamation laws, bracketing aside the anonymity of the commenters. But here are some interesting tidbits informal disclosure by third parties has given us: some commenters believe that Lin's parents are serial securities fraudsters (with links, dates and details), commenters link to a publicity stunt Lin did before where he sold books on his blog then announced he was keeping the money and not sending the books, some commenters link to bad reviews of Lin's work, an astute commenter points out the moral hazard problem that Lin might just keep the money and not produce a second novel, another commenter corrects another that this scheme is not just like the "Bowie Bonds," and more. I think the commenters told us more about this offering than a vetting by the SEC would. All that aside, Lin says there is only one more share left at $2000. Maybe if you get order in the next thirty minutes, you'll get two shares for the price of one.

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