Danielle Hartl

Crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”[1]  Companies in need of financial assistance launch a fundraising campaign online where a mission statement is presented, a goal amount is set, investments from the general public can be monitored, and once the goal amount is reached the securities are issued.[2]  On April 5th, 2012, President Obama signed the Jumpstart Our Business Startups Acts (“JOBS”) giving the Security and Exchange Committee (“SEC”) authority to issue rules “on capital formation, disclosure and registration requirements.”[3]  The SEC used their authority to create a proposed “Crowdfunding Exemption [that] is intended to facilitate capital formation by startups and small businesses by allowing certain companies to raise up to $1 million in any 12-month period through online crowdfunding ‘portals’ in exchange for securities.”[4]  Since the SEC’s regulations have been released for public comment, the crowdfunding exemption has created excitement in the business world.[5]

Critics have already speculated that this new SEC ruling will bring both advantages and disadvantages.  Companies in financial need could publicly solicit money in a  quick and efficient manner in exchange for securities while still being regulated by the SEC.[6]  However, critics claim that crowdfunding does not allow entrepreneurs to receive useful feedback, investors are susceptible to fraud, and unprofitable businesses may get funded.[7]  Only time will tell how these new crowdfunding regulations will apply to upcoming legal conflicts.

In a practical sense, this new regulation exemption could affect both the legal and business communities in several ways.  First, while crowdfunding can prove to be an efficient way of gaining capital, it does not allow for collaboration.  From a business perspective, collaboration could prove useful in producing a better business model and product.  From a legal perspective, the lack of communication between businesses and investors could lead to a new kind of fraud to which our judicial system will need to adapt precedent.[8]  Second, crowdfunding investors do not necessarily have the expertise or business savvy to invest money in successful business ventures.[9]  Crowdfunding will fund the creation of several businesses, many of which will be unsuccessful, generating the need for bankruptcy law to adapt to how the dissolution of crowdfunded corporations will settle the business’s debts.  While crowdfunding gives businesses the opportunity to obtain financial assistance in a new way, the judicial system will need to find the proper way to punish fraud and handle bankruptcy cases.


[1] Tanye Prive, What is Crowdfunding and How Does it Benefit the Economy, Forbes (Nov. 27, 2013), https://www.forbes.com/sites/tanyaprive/2012/11/27/what-is-crowdfunding-and-how-does-it-benefit-the-economy/.

[2] See id. (emphasizing that crowdfunding is difficult but utilized by startup companies and businesses that want to grow).

[3] Jumpstart Our Business Startups (JOBS) Act, Pub. L. No. 112-106, 126 Stat. 306 (2012).

[4] Matthew S. Brown & Jonathan D. Weiner, SEC Proposes New Rules for Crowdfunding Exemption Lexology (Oct. 25, 2013), https://www.lexology.com/library/detail.aspx?g=218c75aa-02a1-45df-92a1-fb7a9f9ecca3.

[5] See Jason Bramwell, SEC to Propose Crowdfunding Rules Under JOBS Act, Accounting Web (Oct. 28, 2013), https://www.accountingweb.com/article/sec-propose-crowdfunding-rules-under-jobs-act/222618 (referencing the beliefs of Mary Jo White, Chair of the SEC).

[6] See Dave Michaels, Crowdfunding for Internet Stock Sales Approved by SEC, Bloomberg (Oct. 24, 2013), https://www.bloomberg.com/news/2013-10-23/sec-to-vote-on-crowdfunding-plan-as-white-advances-jobs-act-1-.html (“Businesses and startups too small or risky to attract funding from banks or venture capitalists are expected to use equity crowdfunding”).

[7] See Steven Dupree, Crowdfunding 101: Pros and Cons, Stanford Graduate Sch. of Bus. Ctr. for Entrepreneurial Studies (last visited: Nov. 1, 2013), https://www.gsb.stanford.edu/ces/crowdfunding-101 (explaining the controversy surrounding crowdfunding).

[8] See Steven M. Davidoff, Trepidation and Restrictions Leave Crowdfunding Rules Weak, N.Y. Times Deal Book (Oct. 29, 2013), https://dealbook.nytimes.com/2013/10/29/trepidation-and-restrictions-leave-crowdfunding-rules-weak/?_r=0 (noting that the lack of proper identification an entrepreneur can swindle his investors out of their money).

[9] See id. (estimating that “40 percent of venture capital investments fail, 40 percent break about even and only 20 percent have a decent to high return”).

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