Crowdfunding Without the Crowd

Abstract

The final crowdfunding rules took three years for the SEC to pass, but crowdfunding — the offering securities over the Internet — is now a reality. But now that crowdfunding is legal, will it be successful? Will crowdfunding be a regular means by which new companies raise money, or will it be relegated to a wasteland of the worst startups and foolish investors? This Article argues that crowdfunding has greater chance of success if regulators abandon the idea that the practice does (and should) employ “crowd-based wisdom.” Instead, I argue that crowdfunding needs intermediation by experts that mirrors 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. Funding portals were originally conceived of as almost completely passive entities who could not subjectively “curate” (or screen) the startups that wished to list on the sites. The final SEC rules permit some funding portal curation, which will allow funding portals to list, on the whole, companies with a better chance of success for investors to choose from.

This Article argues, 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 a site’s 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 nudging from expert investors will give crowdfunding a better chance of facilitating market successes while improving investor transparency by offering heightened guidance from industry experts.

Keywords: Crowdfunding, Entrepreneurship, Experts, Wisdom of Crowds, Angel Investors, Venture Capitalists, Startups, Funding Portals