Christine Hurt (University of Illinois College of Law) has posted Pricing Disintermediation: Crowdfunding and Online Auction IPOs on SSRN. Here is the abstract:
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 Securities Act. For entrepreneurs looking to raise start-up capital, crowdfunding was attractive but dangerous. Some investor crowdfunding portals, such as ProFounder, Prosper and Lending Club, purported to give entrepreneurs an easy and legal way to crowdfund equity capital or interest-bearing loans; however, regulatory scrutiny caught up with those skirting securities laws.
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, at least in theory. However, the statutory language 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 costly burdens added to this would-be alternative. The most optimistic commentators hope that crowdfunding eases access to capital markets for promising for-profit ventures, creating a new step in the life cycle of a startup: friends and family funding, crowdfunding, angel investing, venture capital, IPO. On the other hand, critics predict that crowdfunding goes the way of the online auction, an unnecessarily complicated mechanism that stigmatizes those issuers who try to sidestep traditional Wall Street intermediaries.
However, even if crowdfunding may not be the optimal path for start-ups with an ultimate goal of a successful IPO, 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. For-profit social entrepreneurs may be able to use the crowdfunding vehicle to brand themselves as pro-social, attracting individual and institutional cause investors who may operate outside of traditional capital markets and may look for intangible returns. Just as charitable crowdfunders rebut the conventional wisdom that donors expect tax-deductibility, prosocial equity crowdfunders may rebut the conventional wisdom that early equity investors expect high returns or an exit mechanism. This avenue may be an attractive alternative to private equity financing, which may be tempting but may also lead to mission drift and loss of founder control.