Pricing Disintermediation: Crowdfunding and Online Auction IPOS

Recently, the concept of crowdfunding has reignited a desire among both entrepreneurs and investors to harness technology to assist smaller issuers in the funding of their business ventures. Like the online auction IPO of the previous decade, equity crowdfunding promises both to disintermediate capital raising and democratize retail investing. In addition, crowdfunding could make capital raising more accessible to small issuers than any type of IPO or private offering. Until the passage of the Jumpstart Our Business Startups Act (“JOBS Act”) in 2012, however, crowdfunding sites operated in a netherworld of uncertain regulation. In this crowdfunding Wild West, various types of entrepreneurs raised monies in various ways, some in obvious violation of the Federal Securities Acts. The passage of Title III of the JOBS Act, the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (“CROWDFUND” Act) seemed to bless the attempts of crowdfunding pioneers in the area of capital raising. The statutory language, however, does not exempt early entrants’ efforts; instead, it provides a mechanism for future attempts to qualify for an exemption. The proposed Regulation Crowdfunding leaves little doubt that crowdfunding will not be easy: disclosure requirements, portal registration, and capital limitations are just a few of the costly burdens added to this would-be alternative. Even if crowdfunding may not be the optimal path for startups with an ultimate goal of a successful IPO, though, crowdfunding may be useful for other types of for-profit ventures. Regardless of the future of the SEC regulations, the legal charitable crowdfunding of donations will be unaffected and will continue to increase in popularity and acceptance. With the growth of charitable crowdfunding, for-profit social entrepreneurship may find equity crowdfunding both appealing and available as an attractive alternative to private equity financing, which may be tempting but may also lead to mission drift and loss of founder control.

The full text of this Article is available to download as a PDF.