The sharing economy

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CBA National Magazine  |  By Leo Singer December 2012 Issue

CBA national magazine

Why our laws need to be updated to stop preventing us from sharing.

“Life, liberty, and property do not exist because men have made laws,” Frédéric Bastiat wrote more than a century and a half ago. “On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.” If the French political economist were alive today, he could say that it is time for our laws to do some catching up again.

The way we transact today is rapidly evolving. Network technology is powering the rise of a sharing economy that is changing our views of property and enabling everything from co-operation and community ownership to crowdsourcing. Think of the growing popularity of car-sharing arrangements; or the hordes of freelancers building networks of co-working spaces all over the world; or the practice of subletting a rented apartment on AirBnB to out-of-towners, just to pocket a little cash to finance a weekend trip to New York City.

But as a new generation of consumers frees itself from the moorings of traditional commerce, it is becoming apparent that lawmakers and lawyers will have to address the fact that our laws and legal practices are often out of sync with the sharing economy’s new realities.

“The reality of most actitivies in the sharing economy is that they don’t fit into traditional legal boxes and categories,” says Janet Orsi, a lawyer based in Berkeley, California, who advises social enterprises with unconventional needs. “Now transactional law­yers are needed, en masse, to aid in an epic reinvention of our economy system.”

Hard times, creative solutions

To be sure, informal transactions have always been part of community life (I’ll give you a basket of home-grown cucumbers; you feed my cat when I’m out of town for the weekend).

"But the new sharing economy is more than about choosing access to goods and services over ownership. It has unlocked the value of what were once difficult-to-trade assets."

But the new sharing economy is about more than choosing access to goods and services over ownership. It has unlocked the value of what were once difficult-to-trade assets. And people’s livelihoods are now depending on it. Consider how community-supported agriculture allows customers to pay in advance for regular food deliveries, direct from a local farm, thus bypassing the supermarkets. Or how micro-lending schemes and crowdfunding enable ordinary people to invest more easily in local and social enterprises and community start-ups.

The enthusiasm for sharing is also partly driven by the dire state of the world economy. In Spain, thousands of cash-strapped young people, faced with a lack of hard currency, and lacking the capital to create businesses for themselves, are using time banks to create wealth by other means. They swap skills, metered by the hour: an hour’s worth of accounting will buy an hour’s worth of time from a carpenter or gardener. Skills that would otherwise lie dormant are used and enjoyed: without the need for liquid money.

As all lawyers know, every day we enter into contracts by the tens without ever putting them into writing. But one should expect the rise of the sharing economy to have a broad range of legal implications.

Liability is the first concern. Take peer-to-peer car sharing, a system that allows ordinary people to lend their cars to complete strangers — and get paid for it. In April, a Boston resident crashed a car borrowed through a car-sharing outfit called RelayRides. He was killed in the collision, and four other people were seriously injured. Liability insurance, held by the RelayRides organization, was capped at $1-million, but the claims threatened to exceed that amount. Some auto insurance companies refuse or terminate coverage if their policyholders engage in peer-to-peer car sharing, citing liability concerns.

Taxation is also problematic. If I go to a store and buy a hand-painted ceramic dog to add to my collection, I’ll pay sales tax on that transaction, and the store will pay tax on any profits. But what if I offer to paint their fence in exchange? Will I still have to pay sales tax on the transaction — and income tax on the payment in kind? When does an informal barter become subject to tax law?

An infrequent or informal swap of vegetables is unlikely to attract the attention of the taxman. But if I have effectively created a backyard cucumber business, which makes up a significant chunk of my economic activity, then I will no doubt be advised to declare the value of the favours I receive in return. No one would argue that the sharing economy should be exempt from tax: but the rules are too often blurry and ill-defined.

Massing crowds

One of the biggest challenges for new community start-ups is fund-raising. “There’s a lot of people with great ideas,” Mason says, “but try to figure out how the capital comes in to fund the idea.”

Crowdfunding is an innovative technique for raising money, which deploys social networks to gather large numbers of small contributions for a project — whether it’s a theatre show, a new gadget, or even a real estate development such as Montreal’s Notman House,  a co-working office space for early-stage technology start-ups. In most cases, funders receive gifts related to the project, or kudos, or a mixture, depending on how much they kick in. Sometimes they’ll get a finished product in return for their investment.

"At the moment it’s pretty clear that equity-based crowdfunding in Canada is not lawful." John Wires John Wires LLP

But what if you want to sell equity in your company? From a legal perspective, that can present a problem, says  Orsi: “Say someone wanted to start a café, and they wanted all the customers of that business to be owners as well, and ask each customer to invest $300. Even a small amount of money invested would have required a ton of legal hurdles.” In 2010 Orsi and her colleagues petitioned the U.S. authorities to change the rules, and the recently-minted Jumpstart Our Business Startups Act now makes selling shares on crowdfunding platforms like Kickstarter much easier.

Here in Canada, John Wires, of Wires Jolley LLP in Toronto, is lobbying provincial and federal governments to introduce similar changes to the law. “At the moment it’s pretty clear that equity-based crowdfunding in Canada is not lawful,” says Wires. “And that is a result of certain securities laws that are in place that require things like a prospectus — if you’re going to offer shares openly and publicly. There’s a whole host of formal due diligence and formal legislative compliance measures that people need to go through in order to issue securities.”

And the situation is further complicated by provincial jurisdiction over securities regulations. Wires worries that the U.S. will have a head start in attracting start-ups. “Access to smaller amounts of capital is going to be far more readily available for U.S.-based businesses… If all these foreign jurisdictions are going to be attracting Canadian investment dollars, wouldn’t it make more sense to make sure that money stays within our own borders?”

Resources and Links:
More about John Wires
The Launch Law Blog

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