Darian M. Ibrahim (William & Mary Law School) has posted Crowdfunding Without the Crowd (North Carolina Law Review, Forthcoming) on SSRN. Here is the abstract:
The final crowdfunding rules took three years for the SEC to pass, but crowdfunding — or offering securities over the Internet — is now a reality. Will crowdfunding be a wasteland of startups who cannot find other funding, only to be floated until failure by rubes who are easily parted with their money? This Essay argues that crowdfunding has a much better chance of success if we abandon the idea that it does (and should) employ “crowd-based wisdom” at all. Instead, crowdfunding needs intermediation by experts just like the successful forms of entrepreneurial finance (e.g., angel investing and venture capital) that have preceded it.
The final SEC rules move us in the right direction. At the heart of the crowdfunding experience lies the “funding portal,” or the website that will actually list the startup as an investment opportunity. As originally promulgated, funding portals were to be almost completely passive entities who could not subjectively “curate” (or screen) the startups that wished to list on the site. The final SEC rules permit some funding portal curation, which will allow funding portals to list better quality startups.
As I will argue, however, this permitted curation does not go far enough, given a funding portal’s justified concern over becoming a broker-dealer. Thus, I suggest ways in which expert investors participating in crowdfunding offerings can and should use message boards and investment clubs to further guide unsophisticated investors toward better investment choices. At the same time, I acknowledge potential liability concerns for experts who do so. Together, on balance, careful curation by funding portals and expert investors will give crowdfunding a better chance of success.