Just say to no crowdfunding
| Autor | Nicholas Herdrich |
| Cargo | Associate, Foley & Lardner, Madison, WI; J.D., University of Wisconsin, 2015; B.B.A., University of Wisconsin, 2005 |
| Páginas | 157-177 |
JUST SAY NO TO CROWDFUNDING
NICHOLAS HERDRICH *
I. Introduction .............................................................................................................................157
II. Background .............................................................................................................................. 158
A. Crowdsourcing’s Avoidance of Securities Regulation ............................................. 159
B. Equity Crowdfunding Options ...................................................................................... 161
1. Federal crowdfunding still uncertain ..................................................................... 162
2. States provide an answer to federal crowdfunding delays ................................. 164
III. Crowdfunding’s Undelivered Promise to Early Stage Businesses................................ 167
A. A Better Option: Deep Pockets and Smart Money .................................................... 167
B. Too Many Requirements and Risks to Justify a Small Crowdfunding Round .. 170
C. Crowdfunding’s Final Frontier: Niche, Situational Offerings ................................. 173
IV. Conclusion: At Best, Crowdfunding Serves a Niche Market, Which May Not Be
Worth Its Risks ............................................................................................................................... 176
V. Appendix 1: Equity Crowdfunding Snapshot ................................................................... 177
I. INTRODUCTION
“[S]tartups aren’t everything when it comes to job growth. They’re the
only thing.”
1
Entrepreneurs and innovation are the future of American business,
2
yet many early-stage businesses struggle to raise capital.
3
Without capital, many
* Associate, Foley & Lardner, Madison, WI; J.D., University of Wisconsin, 2015; B.B.A., University
of Wisconsin, 2005.
1
Tim Kane, The I mportance of Startups in Job Creation and Job Destruction, EWING MARION KAUFFMAN
FOUNDATION, 2 (July 2010), http://www.kauffman.org/ uploadedFiles/
firm_formation_importance_of_startups.pdf (analyzing the U.S. government report called
Business Dynamics Statistics and concluding that, without startups, the U.S. ec onomy would
have no net job growth).
2
See, e.g.,The 2012 State New Economy Index: B enchmarking Economic Transformation in the States, THE
INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION, 3 (2012), http://www2.itif.org/ 2012-
state-new-economy-index.pdf. (“For the United States to be competitive, one key will be to
compete more on the basis of innovation and entrepreneurship, and less on cost. With a
globalized economy enabling easy access to low cost production systems in nations like Mexico
and China, U.S. competitive advantage will continue to be found in making things and prov iding
traded services that other nations are unable to make or provide as easily or as efficiently.”);
Darian M. Ibrahim, Financing the Next Silicon Valley , 87 WASH. U. L. REV. 717, 723 (2010) (stating that
non-tech regions in the United States are attempt ing to spur entrepreneurial growth as the
country transitions from a manufacturing economy to a knowledge economy).
3
See, e.g., Kevin Roose, Some Tech Start-Ups Struggle in Rising Tide of Fund-Raising, N.Y. TIMES DEALBOOK,
(Jun. 6, 2011), http://dealbook.nytimes.com/2011/06/ 06/some-tech-start-ups-founder-in-rising-
tide-of-fund-raising/ (describing the struggle early stage businesses face in their efforts to raise
capital, especially with expansion rounds of capital between $5 and $10 million).
University of Puerto Rico Business Law Journal
Vol. 6
158
businesses fail to launch or achieve the requisite growth necessary to be
successful.
4
In an effort to address this problem and fuel economic growth in the
United States with increased access to capital, the federal government passed the
Jumpstart Our Business Startups Act (the “JOBS Act”) in 2012, which gave early-
stage businesses the ability to participate in crowdfunding and raise capital by
selling securities over the Internet.
5
In essence, securities-based crowdfunding is a large number of
individuals contributing small amounts of capital to fund a company in exchange
for the company’s securities.
6
Crowdfunding utilizes the Internet’s broad
accessibility to promote a new business and attract investors.
7
Some critics of
crowdfunding fear that it will open the door to fraud and the exploitation of
unsophisticated, non-accredited investors.
8
Advocates believe that crowdfunding
democratizes investment and provides a boost to local businesses.
9
This article argues that crowdfunding provides access to the wrong types
of capital and is principally tailored to niche situations. Part I of this article
discusses federal securities law in general, donation-based crowdsourcing, federal
crowdfunding legislation, and State reactions to the Securities Exchange
Commission’s (the “SEC”) failure to implement the federal crowdfunding
legislation. Part II of this article argues that (1) angel and venture capital funds
are a better source of capital for early-stage businesses; (2) the crowdfunding
requirements are onerous and potentially unworkable for early-stage businesses;
and (3) crowdfunding may only be appropriate for niche situations. Finally, this
article concludes that, despite its promise, crowdfunding legislation has failed to
live up to the hype and legislatures should focus on seeding the economy with
ideas, not capital.
II. BACKGROUND
4
See generally Chris Cam illo, Is Intrastate Crowdfunding t he Future of Economic Growth?, 19 WESTLAW J.
DERIVATIVES 1 (2013).
5
Jumpstart Our Business Startups Act, Pub. L. No. 112 -106, 126 Stat. 306 (2012) (codified in
scattered sections of 15 U.S.C. ). The JOBS Act also implemented several non -crowdfunding
related measures, including l ifting the ban on general solicitation of accredited investors who
have met the income and net-worth requirement under Regulation D.Id. The impetus behind
crowdfunding was that small business failures due to a lack of funding, the limited availability of
traditional funding sources, the emergence of consumer -sourced financing, a nd the ability for
technology to make capital raising possible. Sara Hanks & Andrew Stephenson, Online Securities
Offerings, 33 NO. 2 BANKING & FIN SERVICES POL’Y REP.1, 1–2 (2014).
6
Sean M. O'Connor, C rowdfunding's Impact on Start-Up IP Strategy, 21 GEO. MASON L. REV. 895, 897
(2014).
7
See Camillo, supra note 4 at 1.
8
See, e.g., Rick Romell, MobCraft Beer is first to tap Wisconsin's 'crowdfunding' experiment , MILWAUKEE
JOURNAL SENTINEL (June 9 , 2014), http://www.jsonline.com/business/mobcraft-beer-is-first-to-
tap-wisconsins-crowdfunding-experiment-b99283034z1-262450551.html.
9
Id.
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