The best kind of pandemic

Passion is contagious.  In fact, when we are around passionate people working toward a goal, only the dourest among us will come away without having at least a little bit of that enthusiasm infect our own perspective.  Examples of mobocracy, rioting and pillaging notwithstanding, the communicable nature of passion is usually a good thing.

This kind of shared passion also happens to be the guiding principle behind something near and dear to the hearts of many startup companies – including many fledgling hooch companies – today.  That passion forms the basis for crowdfunding platforms like Indiegogo and Kickstarter.

The premise behind these sites is relatively simple.  A promoter with passion for a particular project (or potential project) seeks to connect with others who have a similar passion.  By connecting, the promoter seeks to ignite backers’ desires to help move the project forward by opening their wallets.  And since the project can be anything from a work of art to a new consumer product, the number of potential crowdfunding opportunities is almost unlimited.  [Note, I say “almost unlimited” because in my capacity as HoochLawyer, I’ve seen a few companies try to utilize Kickstarter only to be frustrated by some of its rules for campaigns – more on that later.]

There are numerous benefits to this approach to funding, and the first among them may be that by going this route the promoter is affirmatively not selling securities.  Why is that important?  Firstly, because the sale of securities in the United States is only slightly less regulated than the sale of alcohol.  A hooch company that wants to fund expansion or a new product line may already have enough regulatory hurdles to overcome before adding the Securities and Exchange Commission and a state securities regulatory authority to its list of friends and family.  Plus, a TTB-regulated entity that decides to sell securities can actually trip over TTB rules (e.g., DSP ownership rules that require amended permit applications in the context of new equity owners) depending on the size and nature of the securities offering.  So these companies often (but certainly not always) prefer to sell something other than shares of stock or promissory notes when they’re going out to raise capital.

With that as background, what does a well-meaning hooch company sell in a Kickstarter or Indiegogo campaign?  The short answer is “perks.”  The longer answer is a bit more complicated.

Both platforms have rules against selling securities (there’s a good reason for this – the platforms might themselves need to register with state and federal securities authorities if they didn’t maintain this prohibition).  But a promoter can offer items of value to contributors in the campaign, so contributors aren’t limited to receiving simply the undying gratitude of the promoter.  Cruise around the sites and you’ll see an assortment of perks being offered – from t-shirts advertising the project to examples of the project/product itself.   And this is where one of the key distinctions between Kickstarter and Indiegogo for hooch companies kick in.  Kickstarter’s rules specifically prohibit providing alcohol as a perk – and while Indiegogo’s rules do as well they also specifically state that offering as a perk a voucher which can be redeemed for an alcohol product is permitted.  [Note: it is possible that you could make this work on Kickstarter as well – but a survey of Kickstarter campaigns with “distillery” in the title reveals campaigns which do not include a voucher perk – so they appear to monitor this fairly closely.]  In any event, if you decide to go this route make sure you remember that just because Indiegogo allows you to offer the perk does not mean that the transaction need not comply with state and federal laws governing hooch.  Those will still apply.

Do these campaigns work?  That is, after all, perhaps the most important question.  Unfortunately, the statistics aren’t particularly encouraging.  According to Kickstarter, 35.8% of the projects started on the site are ultimately successful.  Even for someone who (like myself) was not a math major it is pretty easy to figure out that this means that 64.2% of the projects fail.  Indiegogo’s statistics aren’t as easily discerned, but then again if they were better than Kickstarter’s one supposes that they’d be crowing about it.

These aren’t great odds.  So how do you beat them?  It gets back to passion.  The most successful campaigns start with a flurry of activity – with the majority of successful campaigns receiving the bulk of their funding immediately after launch (and then another slug of funding immediately before closing the campaign).  In between, campaigns struggle to maintain (and increase) momentum.

All this suggests that, just like any other funding campaign, preparation is a key to the successful completion of a crowdfunding campaign.  To achieve the best chance of success, you should be working to build the passion behind your project before you launch, lining up your cheerleaders and influencers [Note: don’t inexplicably fire them] to help build the passion behind the project.  With luck it – and your project – will go viral.  Like a pandemic – the good kind.