The sharing economy
December 2012 Issue
Why our laws need to be updated to stop preventing us from sharing.
Illustration by Tim Zeltner/i2iArt
“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.
That said, there are already legal structures in place that seem appropriate for the sharing economy. The co-operative has been around for decades. Economically, co-ops are a force to be reckoned with (the top 300 co-ops in the world have an impressive combined revenue of $1.6-trillion). Co-ops are owned and controlled by their members — whether consumers, producers, or businesses. Each member has one vote and a voice in the governance of the organization.
Vancouver lawyer Martha Rans, best known for her work with the arts community and non-profit organizations, sees a newfound enthusiasm for this venerable institution: “Some of the young lawyers are going after co-op business,” she says. “Partly because they see it as an opportunity, but partly because they’re not afraid to get in there and take some risks. Some of the old guard are more risk-averse — because we’ve been involved in stuff that went wrong.”
But Rans cautions that the co-op life is not necessarily an easy one. She warns her clients that co-ops place a heavy burden on the administration of an organization; “One member one vote sounds really simple, but in actual practice it’s a lot of work. Sharing is a lot more work for people — and it also can be very challenging to explain basic governance to people.”
"No one would argue that the sharing economy should be exempt from tax: but the rules are too often blurry and ill-defined."
New forms of social enterprises may need new kinds of organizational structure, says Orsi. Traditional co-ops, non-profits and charities have their own particular restrictions and regulatory burdens, she says. “Say someone wants to form a co-operative… and it’s going to be a shared work space where lots of people can come in and use the tools to do manufacturing projects. And it’s kind of an enterprise incubator where they want it to be owned by everyone, and they have a charitable aspect to it as well.” The challenge, Orsi says, is trying to figure out what kind of entity that could be. “It’s sort of a non-profit, but it doesn’t really meet all the requirements. It’s sort of a co-operative, but there are charitable aspects to it. With a lot of these clients it’s difficult to fit them into traditional legal structures.”
Canadian social enterprises are also looking for alternatives, and the law is starting to respond. Margaret Mason, of Vancouver firm Bull Housser LLP, sees the potential: “There’s just such a huge groundswell of interest,” she says, “particularly in the [BC] Lower Mainland.” Mason’s clients are looking at different forms of business structures, trying to incorporate community-based and non-profit principles in existing business structures. She says that many clients come to her with an unrealistic ideal: a social enterprise structure that is exempt from tax but also doesn’t have any restrictions on their revenue generation. Tough luck, says Mason. “There is no magic bullet — that can’t really happen under the existing structure of the Income Tax Act.”
For some social enterprises, a co-op or charitable status may be the most effective route. But given the restrictions on equity investment in charities, Mason suggests that in many cases a business corporation is the most flexible structure. “If you think of yourself as a social enterprise you are a business with revenue generation, regardless of what your ultimate purpose is. And there are all sorts of ways to hard-wire your social purpose into that.”
One new method of doing exactly that is British Colombia’s Community Interest Company, a corporate structure specifically designed to serve a community purpose. These companies must use some of their profits for stated community purposes — and investors can be assured that their investment will be directed towards a charitable or community activity, even if the company is sold or dissolved.
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 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?”
A new world
The legal issues — taxes, liability and corporate structures — may present challenges. But ultimately the sharing economy may also require an adjustment in attitude. Clients are politically and ideologically committed to the notion, and are looking for lawyers who share their ideals. Rans hopes that lawyers will become more involved with their clients’ cause. “The way that I approach my practice is – how can we be agents for change ourselves? How can our legal role help with that?” Rans says that what’s unique is the underlying ethos of the organizations. “You go to an AGM at the Co-operative Auto Network, and people want to talk about climate change. They take very seriously their membership in the co-op and that’s expressed in ways that touch on policies — in ways that lawyers are not always comfortable with.”
As a new generation becomes accustomed to life in the new sharing economy, and grapples with an uncertain economic future, sharing is likely bound to become a permanent and increasingly important piece of our daily lives. Bastiat would likely be the first to suggest that it is up to the legal world to keep up with the times, and tune in to its possibilities.
Leo Singer is a writer based in Montreal.