The Gatekeepers of Crowdfunding
Andrew A. Schwartz, Th e Gatekeepers of Crowdfunding
The G atekeepers of Crowdfunding
Andrew A. Schwartz 0 1
0 University of Colorado Law School , USA
1 Thi s Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information , please contact , USA
Part of the Comparative and Foreign Law Commons; and the Securities Law Commons
The Gatekeepers of Crowdfunding
Andrew A. Schwartz*
Securities crowdfunding is premised on two core policy goals:
inclusivity and efficiency. First, crowdfunding is conceived as an
inclusive system where all entrepreneurs are given a chance to pitch
their idea to the ?crowd.? Second, crowdfunding is supposed to be
an efficient way to channel funds from public investors to promising
startup companies. There is a fundamental tension between these
two policy goals, however. A totally inclusive system would ensure
that platforms list any and every company that wants to
participate. But platforms need to curate and select the companies
they list in order to establish a reputation as a reliable market for
investors. This gatekeeping function aids efficiency, but is exclusive
by its nature. Hence, the tension between inclusive and efficient
This Article provides a theoretical and an empirical analysis of
inclusivity versus efficiency in crowdfunding. It also compares the
American crowdfunding system with its counterpart in New Zealand using original research collected by the author during a six-month residency in that country. This research reveals that crowdfunding in New Zealand is much more financially successful
* Professor of Law, University of Colorado Law School. The research for
this Article was undertaken while the author was a Fulbright Research Scholar
in residence at the University of Auckland Law School. For discussion and
comments on prior drafts, I thank Anna Guenther, Jennifer Hill, Adam Hunt,
Darian Ibrahim, Trish Keeper, Seth Oranburg, Simon Papa, Allison Schwartz,
Phillipa Stone, Susan Watson, Peter Watts, as well as participants in seminars
at the University of Sydney Law School, the University of Auckland Law School,
the Legal Research Foundation of New Zealand, and the Financial Markets
Authority of New Zealand, and conferees at the Equity Crowdfunding Symposium
at the University of Auckland. For research assistance, I thank Stephanie Carr,
Elizabeth Field and Morgan Pullam, and for financial support, I thank the United
States Department of State, the J. William Fulbright Foreign Scholarship Board,
and Fulbright New Zealand. This Article is dedicated to my baby daughter, Irene
Zipporah Schwartz, who split her first year evenly between the United States and
than in the United States. This Article explains this outperformance
on the basis that New Zealand?s system is focused solely on
efficiency, even at the expense of inclusivity. In the United States,
by contrast, we closed our eyes to the tension between efficiency and
inclusivity and tried to achieve both at the same time. In practice,
and perhaps as could have been expected, this has led to only minor
success on both fronts.
Broadening the analysis out, we see that inclusive
crowdfunding is a luxury that only certain countries can manage,
depending on their existing systems for entrepreneurial finance.
The United States has a huge and sophisticated venture capital
industry and thus can afford to sacrifice some efficiency in our
crowdfunding system in order to advance inclusivity. But New
Zealand has long had very little venture capital investment and
hence a real need to develop crowdfunding as an effective new
means for efficiently channeling capital to the country?s startup
companies. The need to consciously trade off inclusivity and
efficiency is an important lesson from the present research.
Securities crowdfunding?a new form of Internet-based public
stock market modelled on Kickstarter and other reward
crowdfunding websites1?has a contradiction at its core. On the
one hand, crowdfunding seeks to create an inclusive system where
any and all entrepreneurs, regardless of who they know or where
they are from, are invited to pitch their company directly to ?the
crowd? (the broad public).2 On the other, crowdfunding is supposed
to be an efficient system where capital-starved startups and small
businesses can get the funding they need to grow, create jobs, and
contribute to the economy.3
These policy goals are in tension. A totally inclusive system
would impose a legal requirement on crowdfunding platforms?
websites that act like online stock exchanges?to include any and
every company that wants to list on their site.4 Reward
1. See infra Part II.B (detailing the parallels between securities
crowdfunding and ordinary crowdfunding).
2. Andrew A. Schwartz, Inclusive Crowdfunding, 2016 UTAH L. REV. 661,
672 [hereinafter Schwartz, Inclusive Crowdfunding].
3. See id. at 666 (observing that the ?rich academic literature? on securities
crowdfunding ?largely focuses on questions of efficiency and efficacy?).
4. See id. at 671 (?An inclusive environment, broadly defined as one in
which ?all people feel valued and respected and have access to the same
opportunities,? can generate positive effects.?).
crowdfunding generally follows this model: Kickstarter does not
screen, curate, or vet the projects before presenting them to the
crowd; anyone with an idea can take a shot.5
But securities crowdfunding platforms have a clear business
need to exclude at least some of the companies who seek to
participate, in order to establish a reputation as a reliable place for
people to invest.6 Imagine a law that required the New York Stock
Exchange to list on its Big Board any company that asked! Just as
with traditional securities markets, some sort of gatekeeping
function for the platform seems vital for the system to function
effectively?or maybe at all.7 Yet gatekeeping necessarily implies
including some companies and excluding others, a direct affront to
the goal of inclusivity and unmediated access to the crowd.8 Hence
the tension between inclusivity and efficiency in securities
The Securities and Exchange Commission (SEC) has
struggled to resolve this tension from the earliest days. The initial
regulations, proposed by the SEC in 2013, adopted a radical
version of inclusivity that would have required online
crowdfunding platforms to list any company that asked to be
included, regardless of the platform?s view of its prospects or the
price of the securities.10 Public commenters, however, pilloried that
5. See Kickstarter Basics, KICKSTARTER, https://www.kickstarter.com/help/
(last visited Jan. 11, 2018)
(answering basic questions
about Kickstarter and its policies) (on file with the Washington and Lee Law
6. Infra notes 275?278 and accompanying text.
7. See infra Part IV.A.1 (discussing the integral role of gatekeepers, or lack
thereof, in the success of crowdfunding operations).
8. See Schwartz, Inclusive Crowdfunding, supra note 2, at 662 (?Inclusivity
is core to the nature of crowdfunding as a distinct form of capital raising.?).
9. The present work is focused solely on inclusivity as it applies to
entrepreneurs. Inclusivity as it applies to investors, while beyond the scope of the
current work, is apparent from the fact that the general public is invited to
participate on the investor side. See Andrew A. Schwartz, The Digital
Shareholder, 100 MINN. L. REV. 609, 611 (2015) [hereinafter Schwartz, Digital
Shareholder] (?Once crowdfunding begins, anybody with a startup will be able to
go online and offer a piece of the action to the American people. And the
community of investors . . . will be inclusive and diverse as well.?).
10. See infra Part II.D (analyzing the SEC?s proposed rule for inclusion of
companies on its site listings).
proposal as being overly harmful to efficiency.11 In the end, the
SEC relented, and the final version of its crowdfunding regulations
(operative since 2016) do allow platforms to pick and choose which
companies to list on their sites.12 This episode, described in Part
II.D below, neatly encapsulates crowdfunding?s inherent tension
between efficiency and inclusivity.
Securities crowdfunding, while born in the United States, has
become a worldwide phenomenon,13 with New Zealand leading the
charge.14 As Part III describes, that country was one of the earliest
foreign jurisdictions with a functioning legal regime for
crowdfunding, having launched its equity crowdfunding market in
2014,15 two years ahead of the United States.16 Since then, New
Zealand has become an international leader in the field, making it
an ideal destination for an academic study of this emerging area
in securities regulation.17
The author accordingly spent the first half of 2017 on the
ground in New Zealand to study its crowdfunding law and
11. See infra Part II.D (highlighting the effect of public comments on the
12. See infra Part II.D (discussing the SEC?s final rule regarding company
listings on platforms).
13. See KIM WALES, PEER-TO-PEER LENDING AND EQUITY CROWDFUNDING: A
GUIDE TO THE NEW CAPITAL MARKETS FOR JOB CREATORS, INVESTORS, AND
ENTREPRENEURS 21?54 (2018) (describing securities crowdfunding laws recently
enacted in dozens of nations around the world).
14. See infra Part III (discussing New Zealand?s recent, and quick,
development in the field of crowdfunding).
15. New Zealand?s system is called ?equity? crowdfunding because it is
limited to the issuance of shares of stock. See Joseph J. Dehner & Jin Kong,
Equity-Based Crowdfunding Outside the USA, 83 U. CIN. L. REV. 413, 418 (2014)
(?The equity model offers investors the possibility of sharing in the increase over
time in the value of a business, as well as the potential for dividends distributed
from net annual profits of the venture.?). Our domestic system is called
?securities? crowdfunding because United States law permits any type of security,
not just equity, to be crowdfunded. See Andrew A. Schwartz, Crowdfunding
Securities, 88 NOTRE DAME L. REV. 1457, 1458 (2013) [hereinafter Schwartz,
Crowdfunding Securities] (?The new federal CROWDFUND Act authorizes the
?crowdfunding? of securities, defined as the sale of unregistered securities over the
Internet to large numbers of retail investors, each of whom only invests a small
16. See infra Part IV.A (noting the time difference between New Zealand and
the United States).
17. See infra Part IV.B (suggesting that New Zealand is more successful with
crowdfunding because it is willing to focus on efficiency instead of inclusivity).
marketplace, conducting local research and interviewing
entrepreneurs, platform operators, investors, lawyers, academics,
and government officials (including the Minister of Commerce).
This Article is based on this original research and analyses of the
United States and New Zealand crowdfunding markets in terms of
inclusivity and efficiency.18
In my research, I found that New Zealand never really had to
grapple with the tension between inclusivity and efficiency, simply
because they are not trying to achieve both goals.19 Rather, as Part
III.C shows, their statute and regulations were designed for
efficiency, and efficiency only.20 Indeed, key components of New
Zealand?s crowdfunding law help achieve efficiency at the direct
expense of inclusivity.21 Platforms are empowered to, and do, take
their role as gatekeepers very seriously, and have always had the
clear power to exclude anyone they wish.22 In the end, they are
rather exclusive, especially the leader, Snowball Effect, which lists
only 2% of the hundreds of companies that ask to be included on
With a laser-like focus on efficiency, New Zealand has
established a crowdfunding market that is orders of magnitude
more financially successful than its counterpart in the United
States.24 Data presented in Part IV.A compares the first year of
crowdfunding in New Zealand (2014?2015) with the first year of
crowdfunding in the United States (2016?2017).25 The numbers
18. Other aspects of my research are reported and discussed in other articles,
including Andrew A. Schwartz, Equity Crowdfunding in New Zealand, 2018 N.Z.
L. REV. (forthcoming) [hereinafter Schwartz, Crowdfunding in New Zealand].
19. See infra Part III.C (noting that New Zealand prefers to focus on
20. See infra Part III.C (stating that New Zealand seeks the utmost
21. See infra Part III.C (noting that New Zealand is willing to risk inclusivity
to promote efficiency).
22. See infra Part IV.A.1 (discussing how New Zealand promotes efficiency
by allowing platforms to exclude who they want).
23. See infra Part IV.A.1 (describing the exclusivity of crowdfunding
platforms in New Zealand).
24. See infra Part IV.A (detailing New Zealand?s success in the use of
crowdfunding and the efficiency of its use).
25. See infra Part IV.A (comparing New Zealand and the United States? first
years of crowdfunding).
are astounding: Scaled for the size of its economy,26 and focusing
on the first year in each jurisdiction, New Zealand had thirteen
times as many crowdfunding campaigns which collectively raised
about thirty times as much capital, and the success rate for New
Zealand crowdfunding campaigns was about 80%, compared with
50% in the United States.27 In other words, freed from a quest for
inclusivity, New Zealand has succeeded in creating a much more
efficient system for channeling capital to startup companies and
small businesses than has the United States.
But the United States had two policy goals, both inclusivity
and efficiency, so it should come as no surprise that New Zealand,
which focused solely on the latter, would outperform on that
front.28 This raises the question of how inclusive the American
system is in practice, and that issue is taken up in Part IV.B, which
analyzes the empirical evidence from crowdfunding?s recently
concluded first year. As will become clear, the data suggests that
American crowdfunding is relatively inclusive, as platforms seem
to exercise their gatekeeping function in a more flexible manner
than in New Zealand.29
In the United States, very young startups that lack revenue,
and that lack pre-existing supporters, are not screened out, but
rather are often given a chance?for better or worse?to pitch their
ideas to the crowd.30 In the United States, the average age of a
crowdfunding company is just two years and almost none have
previous investors; however, in New Zealand, the average age is
eight years and it is common to have pre-existing investors.31 In
terms of demographic inclusiveness, the picture is mixed.32
Finally, the notably lower success rate for crowdfunding
26. New Zealand?s GDP is about 1% that of the United States.
27. See infra Part IV.A (detailing New Zealand?s success).
28. See infra Part IV.A (demonstrating why New Zealand has been more
successful than the United States).
29. See infra Part IV.B (stating New Zealand is more stringent with its
30. See infra Part IV.A (demonstrating the United States? willingness to
include more companies on their crowdfunding platforms).
31. See infra Part IV.A (comparing the average age of crowdfunding startups
in the United States and New Zealand).
32. See infra Part IV.B (discussing demographics of entrepreneurs raising
money through securities crowdfunding).
campaigns in the United States (50%) compared with New Zealand
(80%) also indicates that the American system is more open and
inclusive of entrepreneurs, and more likely to let a highly
speculative startup at least try to convince the crowd.33
What explains the different approaches to crowdfunding in
America and New Zealand? It is not because New Zealand cares
little for inclusivity, and only about efficiency. Rather, it appears
to stem from the very different levels of other types of startup
capital in each country. The United States has long had the largest
and most mature system of venture capital (VC) and angel
financing in the world, and could afford to use crowdfunding as a
complementary system more focused on inclusive opportunities for
entrepreneurs.34 New Zealand has long had a much thinner pool of
VC and angel financing, even for its size, and had a national
interest in using crowdfunding as a substitute for those forms of
startup finance.35 It could not afford to be distracted by a secondary
goal of inclusivity.
This comparison between the United States and New Zealand
holds a broader lesson that is especially important to the many
other countries currently drafting (or reforming36) their own
crowdfunding laws: Inclusive crowdfunding is a luxury.37 As Part
V explains, jurisdictions with low levels of VC and angel financing
(e.g., Italy and Spain) may wish to ignore inclusivity and just focus
on creating an efficient system for crowdfunding.38 Jurisdictions
that already have abundant VC and angel funding (e.g., Israel and
the United States) can afford to employ crowdfunding as a way to
33. See infra Part IV.B (considering the success rates of crowdfunding
companies in New Zealand and the United States).
34. See infra Part IV.B (discussing the United States? prowess for venture
capitalism, especially in Silicon Valley).
35. See infra Part IV.B (discussing New Zealand?s general lack of venture
capitalism and use for crowdfunding).
36. The United States, through the Financial Choice Act of 2017, is seeking
to amend its current crowdfunding law. See, e.g., H.R. 10, 115th Cong. ?? 476?
479 (2017) (amending the federal crowdfunding law).
37. See infra Part V (noting how inclusivity provides greater opportunity and
is a policy not followed everywhere else).
38. See infra Part V (elaborating on the trade-off between inclusivity and
efficiency and why a country may choose to focus on one over the other).
promote entrepreneurial participation among a broad segment of
II. Securities Crowdfunding in the United States
This Part introduces the concept of securities crowdfunding,
as well as the domestic legal authority and policy behind it.
Authorized by a federal statute in 2012 and implemented through
SEC regulations in 2016, securities crowdfunding has two primary
policy goals: First, it seeks to give promising entrepreneurs an
efficient means of gathering seed capital from the public.40 Second,
it aims to create an inclusive form of entrepreneurial finance that
would give anyone and everyone the opportunity to pitch their idea
to the public.41
These two goals are in fundamental tension, however, because
a fully inclusive system that excluded no one would be hopelessly
inefficient.42 This tension played itself out during the regulatory
process, as the SEC initially adopted a radically inclusive rule but
ended up issuing final regulations that prioritized efficiency at the
expense of inclusivity.43
A. Precursor: Reward Crowdfunding
Securities crowdfunding evolved out of the prior concept of
?reward crowdfunding,? which is practiced on Kickstarter and
other similar websites.44 Reward crowdfunding, in turn, describes
39. See infra Part V (finding that Israel and the United States have other
opportunities for companies to start outside of crowdfunding, allowing for
crowdfunding platforms to be less selective).
40. See Schwartz, Inclusive Crowdfunding, supra note 2, at 666 (noting that
new literature is discussing the efficiencies of crowdfunding).
41. See id. at 673 (?[A] fundamental and express goal of retail crowdfunding
is to break down the differential treatment of accredited investors and everyone
42. See infra Part II.D (discussing the tension between inclusivity and
efficiency in crowdfunding).
43. See infra Part II.D (discussing the final rule eventually implemented by
44. See Schwartz, Inclusive Crowdfunding, supra note 2, at 663 (noting that
securities crowdfunding was built from reward crowdfunding); Building Rewards,
an Internet-based marketplace for the financing of entrepreneurial
projects.45 In a typical Kickstarter campaign, an artist or
entrepreneur posts to a dedicated website a description of the
project she wants to pursue, the amount of money she needs to
fund it, and usually promises some sort of reward or benefit to
those who provide funding.46 Members of the public?the
?crowd??peruse the various projects available on the website,
decide which one(s) they want to support, and then pledge their
money to the cause.47 If a given project reaches its target amount,
the money is collected and transmitted to the entrepreneur; if a
project fails to meet its target, then the deal is off and no money
For example, a rock band that wants to record an album might
post the idea along with a sample track and ask the crowd to
contribute $20 per person. In return, the band promises to send a
copy of the CD once it is completed. The band uses the money
collected upfront to rent a recording studio, hire a producer, et
cetera. This simple idea has grown in less than a decade into a
multi-billion dollar market: Kickstarter alone reports that over $3
billion has been contributed on its website since its founding in
Jan. 11, 2018)
(discussing common rewards offered in crowdfunding) (on file with
the Washington and Lee Law Review).
45. See Schwartz, Inclusive Crowdfunding, supra note 2, at 663 (?In reward
crowdfunding, financial backers of a project receive its fruits, such as a book, CD,
or video game.?).
See id. (noting different types of rewards offered in exchange for financial
47. See id. at 672 (?[T]he very concept is to invite ?the great mass of people??
the crowd?to invest in whichever startup companies and small businesses they
48. This description is known as an ?all-or-nothing? model, which is the type
practiced on the leading reward crowdfunding website, Kickstarter. See
Kickstarter Basics, supra note 5 (stating a project must achieve its monetary
fundraising goals in order to receive the funds). Other reward crowdfunding
websites, including Indiegogo, do not follow this model and allow the
entrepreneur to collect however much money is pledged. See How it Works for
Entrepreneurs, INDIEGOGO, https://www.indiegogo.com/how-it-works
Jan. 11, 2018)
(describing ?flexible funding?) (on file with the Washington and Lee
49. See Kickstarter Stats, KICKSTARTER, https://www.kickstarter.com/help/
(last updated Feb. 17, 2018, 8:50 AM)
(last visited Jan. 11, 2018)
Most importantly for present purposes, Kickstarter and other
reward crowdfunding websites are totally inclusive platforms
where anyone with an idea can post their project and ask the crowd
for funding. Kickstarter does not pre-screen, curate or vet the
projects prior to presenting them to the crowd. Rather, anyone with
a project can participate.50
Many reward crowdfunding projects fail to reach their targets,
of course; on Kickstarter, for example, more than 350,000 projects
in total have been posted, yet only 124,000 of those have been
successfully funded.51 But the crowd is fickle and as such gives its
financial support to certain projects, but not others.52 Indeed, the
huge amount of failed projects is itself an indication of the reward
crowdfunding?s inclusive nature: All entrepreneurs are invited, not
just those with clearly great ideas or those that are likely to get
(highlighting over $3 billion pledged, 130,000 funded projects, 14,000,000
backers, and almost 43,000,000 pledges on Kickstarter, alone) (on file with the
Washington and Lee Law Review).
50. Kickstarter does have certain prohibitions. It can only be used to fund
?projects,? rather than to raise money for charity or to sell investments. See
Creator Questions, KICKSTARTER, https://www.kickstarter.com/help/faq/
(last visited Jan. 11, 2018)
(noting that only certain projects
are allowed) (on file with the Washington and Lee Law Review). Additionally,
certain items are specifically barred. See Prohibited Items, KICKSTARTER,
(last visited Jan. 11, 2018)
(prohibiting medical treatments, pornographic material and other ?illegal,
heavily regulated, or potentially dangerous? projects) (on file with the
Washington and Lee Law Review). But the key point is that Kickstarter would
not exclude a project because it thinks it is a poor idea, or because it doubts the
capabilities of the entrepreneur. See Creator Questions, KICKSTARTER,
(last visited Jan. 11,
(?[W]e do not investigate a creator?s ability to complete their project.?) (on
file with the Washington and Lee Law Review). Moreover, many of the types of
campaigns that are barred from Kickstarter, such as charitable donations, would
be welcome on other crowdfunding sites. See, e.g., GOFUNDME,
(last visited Jan. 11, 2018)
(noting that it is a
crowdfunding site that welcomes charitable campaigns) (on file with the
Washington and Lee Law Review).
51. See Kickstarter Stats, supra note 49 (presenting total activity on
52. See Schwartz, Inclusive Crowdfunding, supra note 2, at 672 (noting that
the crowd donates to whichever companies it wants, but not necessarily every
company will receive funding).
53. See id. at 662 (?Retail crowdfunding is the most inclusive form of
securities crowdfunding, in the sense that everyone is invited regardless of who
This inclusive nature of reward crowdfunding introduces
certain costs. Because only 35% of the projects posted on
Kickstarter succeed and obtain funding, this means that a large
majority of the projects posted end up as a waste of time and
resources for the creators and backers.54 To post a project takes
time and effort; creators commonly produce a video, draft copy,
promote the project, and so on.55 And backers who review and
pledge their support spend time and energy researching their
choices. But if the project fails to reach its target fundraising
amount, all of those resources go down the drain, with nothing to
show for it.56 To date, about $340 million has been pledged on
Kickstarter to projects that ultimately failed.57
On the other hand, the costs of reward crowdfunding are
pretty modest overall. The cost of creating and posting a project
proposal is generally pretty low, due to the simple online format.58
The market is almost totally unregulated; thus, the compliance
costs are de minimis. Given that the whole market takes place on
the Internet, the research effort expended by backers who invest
in failed projects is probably small in most instances. Moreover,
even a project that does not reach its target may still benefit the
company by, for instance, forcing the founders to concretize and
document their ideas for the business. Finally, just because 65% of
projects fail, this does not necessarily imply that market
participants spent 65% of their time and energy on that group.
Rather, the 35% of successful projects may well have commanded
54. See Kickstarter Stats, supra note 49 (finding that the failure rate on
Kickstarter is over 35%).
55. See Kickstarter Basics, supra note 5 (noting some things project creators
often do to attempt to create a successful project).
56. However, some reward crowdfunding sites, like Indiegogo, do not follow
an all-or-nothing model, and thus, any amount that is pledged is ultimately
collected by the creator. See Choose Your Funding Type: Can I Keep My Money?,
(last visited Jan. 11, 2018)
that a project can keep the money donated to it even if it does not achieve its goal)
(on file with the Washington and Lee Law Review).
57. See Kickstarter Stats, supra note 49 (noting the statistics of failed
58. See infra Part II.B (discussing the efficiencies of crowdfunding).
90% of the market?s attention. All in all, reward crowdfunding
seems like a fairly efficient way to raise capital.
B. Crowdfunding Under the JOBS Act59
Securities crowdfunding takes the concept of reward
crowdfunding and extends it to investments.60 It works just like
reward crowdfunding except that, instead of receiving a tangible
reward, like a CD from a band, the financial backers get a share of
stock or some other financial interest, such as a share in the band?s
profits on the sale of the CD.61
This novel method of online investing holds great promise, but
it also violates the usual legal rules for making a public offer of
securities.62 For, under the federal Securities Act of 1933,63 an
entrepreneur is legally required to ?register? any shares of stock,
bonds, or other securities before offering them to the public.64 This
registration process calls for copious public disclosure about the
59. This Section is adapted from a similar discussion in, Andrew A.
Schwartz, Crowdfunding Social Enterprise in New Zealand, in THE CAMBRIDGE
HANDBOOK OF SOCIAL ENTERPRISE LAW (Joseph Yockey & Benjamin Means eds.,
Cambridge Univ. Press forthcoming 2018) [hereinafter Schwartz, Crowdfunding
60. See 158 Cong. Rec. S1,824-02 (daily ed. Mar. 20, 2012) (statement of Sen.
Merkley) (explaining that securities crowdfunding is based on reward
crowdfunding of the sort practiced on Kickstarter); Schwartz, Inclusive
Crowdfunding, supra note 2, at 663 (noting that securities crowdfunding was
spurred by reward crowdfunding).
61. See Schwartz, Inclusive Crowdfunding, supra note 2, at 663 (?Securities
crowdfunding takes the concept one step further by providing backers with a
security, such as a share of stock, without registering the securities with the
62. See id. (?Selling securities in this way does not violate the federal
securities laws (which generally mandate that one register securities with the
SEC before offering them to the public) because legal ?exemptions? have been put
into place. . . .?).
Pub. L. 73-22, 48 Stat. 74. (codified as amended at 15 U.S.C. ?? 77a?aa
64. See Joan MacLeod Heminway & Shelden Ryan Hoffman, Proceed at Your
Peril: Crowdfunding and the Securities Act of 1933, 78 TENN. L. REV. 879, 918
(2011) (noting that, under the Securities Act of 1933, a company had to register
its stock before issuing it).
company, the securities to be offered, et cetera, and it is a legal
mandate for all public offerings.65
The securities laws expressly allow for ?exemptions? to the
registration requirement, however, and a new exemption for
crowdfunding was created by the federal government in Title III of
the Jumpstart Our Business Startups Act of 201266 (JOBS Act).
This statute was passed with bipartisan support, and many states,
including Colorado and Georgia, have since followed with similar
legislation.67 The enthusiasm for securities crowdfunding is
primarily based on the widely shared view that the traditional
initial public offering (IPO) process in the United States had
become so onerous and expensive that many worthwhile
companies either cannot or choose not to obtain funding from the
public?to the detriment of us all.68
One reason why IPOs are so expensive is the high cost of
complying with securities laws and regulations.69 Under
traditional securities laws, all securities must be first registered
with the SEC or similar agency before being offered for sale to the
public.70 This registration process generally requires that the
company provide full and clear disclosure of the risks of investing
in the IPO, and then provide ongoing disclosures once the company
is public.71 Over the years?the American statute dates from the
1930s?these disclosure requirements have become increasingly
demanding thanks to the accumulation of legislative amendments
and regulatory commands, to the point that the process of going
public costs several million dollars in legal, accounting, and other
fees.72 This has discouraged all but the largest and most successful
companies to conduct an IPO.73
Securities crowdfunding responds to this problem by
exempting crowdfunded offerings from the usual registration and
disclosure requirements for public offerings.74 By eliminating the
substantial attorney costs, underwriting costs, printing costs, and
accounting costs associated with the preparation of a registration
statement, this allows for much lower compliance costs than a
traditional IPO.75 The company likewise need not comply with the
ongoing (and costly) reporting requirements for public
In addition to lower compliance costs, securities crowdfunding
also offers a much less expensive means of promoting an offering
of stock.77 An important component of conducting a traditional IPO
is the so-called ?road show.?78 This is a series of in-person meetings
and presentations to potential investors and which requires the
hiring of public relations, catering, travel, printing, and many
potential rewards of investing in the securities, and then provide ongoing,
regular, and event-based disclosures.?).
72. See id. at 1467 (?[T]oday, the process of going public costs millions of
dollars in legal, accounting, and other fees and, in a potentially related
development, the number of companies electing to do so has shrunk to an all time
73. See id. at 1468 (?[A] registered public offering is just too expensive for all
but the largest issuers.?).
74. See id. at 1460 (noting that the CROWDFUND Act exempts
crowdfunding entrepreneurs from the registration requirement).
75. See id. at 1458 (noting that those costs associated with crowdfunding are
lesser than those associate with a traditional IPO).
76. See id. at 1470 (showing that crowdfunding securities are exempt from
the costly registration and promotion fees of the traditional IPO).
77. See id. at 1467 (noting that crowdfunding greatly reduces the cost of
78. See id. at 1470 (discussing the ?carefully choreographed procedure called
a ?road show??).
other types of consultants and specialists.79 In other words, it is
In securities crowdfunding, by contrast, there is no need for a
physical road show, because it will take place entirely over the
Internet.81 In this way, the cost of promoting a crowdfunded
offering will be much lower than an IPO.82 Even so, American
securities crowdfunding is not entirely free of regulatory red tape
and the associated cost of compliance.83
The JOBS Act authorized securities crowdfunding, but also
imposed many limits and rules on the practice.84 There are hard
monetary limitations both for companies and for investors.85
Companies are only allowed to raise up to $1 million each year
and,86 for investors, the law provides a limit on the amount of
crowdfunded securities that any one investor may purchase per
year. The maximum amount an investor may contribute is
premised on a sliding scale based on income and net worth; for
most people this will calculate out to about $2,000?$5,000.87 The
purpose of this investment cap is to protect investors from putting
more at risk than they can reasonably afford.88
79. See id. (?The road show is not a legal requirement, but is a practical one,
given the norms of the major banks that orchestrate IPOs. This is an expensive
endeavor that calls for public relations, catering, travel, printing, and many other
types of specialists, each of whom command premium fees.?).
See id. (noting the extreme cost of a traditional IPO).
81. See id. (?Another important factor is the lower cost of promoting a
crowdfunded issue via the Internet as opposed to an in-person road show.?).
82. See id. (noting that the internet saves both time and money for
83. See Robert B. Thompson & Donald C. Langevoort, Redrawing the
Public-Private Boundaries in Entrepreneurial Capital Raising, 98 CORNELL L.
REV. 1573, 1605 (2013) (stating it is still difficult to navigate the compliance
matters in JOBS).
84. See id. (noting that instead of creating ?a regulation-free zone,? the JOBS
Act imposed ?a quite heavy and costly set of responsibilities on both issuers and
any intermediaries that assist them?).
85. See id. at 1604 (stating that there is no need to register securities, but
there are limitations on what can be raised).
86. See id. (noting that an issuer can raise only up to one million dollars in
87. See id. (?[T]he main investor protection would have come through
wealth- and income-based limits on how much any single investor could
invest. . . .?).
See Schwartz, Crowdfunding Securities, supra note 15, at 1461 (stating
Under the JOBS Act, transactions must be executed via a
financial intermediary registered with the SEC; thus they cannot
be consummated directly between issuer and investor.89 The
financial intermediaries (also known as ?platforms? or ?portals?)
have numerous responsibilities under the law, including that they
ensure that each investor reviews certain educational information
and positively affirms certain statements, such as that they are
risking the loss of their entire investment.90 Companies may not
advertise the offering themselves; any solicitations must go
through the intermediary.91
Any private domestic company (except ?investment
companies?) may invoke the JOBS Act?s crowdfunding
exemption.92 Public companies, such as those that trade on the
New York Stock Exchange, as well as foreign companies, are thus
excluded.93 Companies must provide numerous disclosures to
investors, intermediaries and the SEC, including the name,
address, and website of the company; the names of directors,
officers, and substantial investors; a description of the business
and the anticipated business plan; a description of the issuer?s
financial condition (which varies based on amount raised); a
description of the purpose and intended use of the proceeds; the
price of the securities; and a description of the ownership and
capital structure of the issuer.94
The JOBS Act provides that companies must state a target for
their fundraising goal, and are to receive the money only if the
that the caps are for the protection of investors from losing too much money in
investments with fewer regulations).
89. See id. at 1462 (noting how financial intermediaries act for the protection
of the investor and issuer).
90. See id. at 1462?63 (detailing the responsibilities intermediaries have in
91. See id. at 1464 (?Issuers are prohibited from advertising the offering
themselves, and any solicitation of the offering must go through the registered
92. See Thompson & Langevoort, supra note 83, at 1575 (?[S]ome offerings
of securities are exempt from ?33 Act requirements because they are ?private? or
otherwise limited in terms of size, scope, or nature of investors being solicited.?).
93. See id. (noting that only private companies can be exempt).
94. See Schwartz, Crowdfunding Securities, supra note 15, at 1464
(?Although the purpose of the Act is to lower the cost of capital for startups by
alleviating burdensome disclosure requirements, a crowdfunding business must
provide some very basic disclosures to the SEC. . . .?).
target is met or exceeded.95 During the pendency of an offer, all
investors have the right to cancel their order at any time.96 If the
funding campaign succeeds, the company must provide annual
reports to investors and the SEC for as long as the securities
remain outstanding.97 Also, crowdfunded securities cannot be
transferred or sold by investors for one year after the date of
purchase, unless being transferred to the issuer, as part of an
offering registered by the SEC, or to an accredited investor or
Finally, to protect investors, the JOBS Act specifically
authorizes civil actions for fraud against issuers, directors, and
officers of companies that mislead crowdfunding investors.99 State
and federal government authorities, including the SEC, likewise
are empowered to take action against wrongdoers.100
The JOBS Act created the basic framework for securities
crowdfunding in 2012, but many issues were delegated to the SEC
to flesh out through rulemaking.101 Perhaps because the SEC was
very busy with other matters, it took the agency several years to
propose and finalize the regulatory framework for crowdfunding.102
95. See id. at 1463 (?The intermediary cannot deliver the proceeds of the
offering to the company until the target amount has been reached or
exceeded. . . .?).
96. See id. (noting that the intermediary ?must allow investors the
opportunity to cancel investment commitments before then?).
97. See id. at 1464 (?Finally, following a crowdfunding round, an issuer must
annually file with the SEC, and make available to investors financial statements
and a report on the results of operations.?).
98. See id. at 1463 (stating that crowdfunding securities cannot be
transferred within one year ?unless being transferred to the issuer, an accredited
investor, a family member of the purchaser, or as part of an offering registered
with the SEC?).
99. See id. at 1465 (noting a party will be liable if they ?make an untrue
statement of a material fact or omits to state a material fact required to be stated
or necessary in order to make the statements . . . not misleading?).
100. See id. at 1465 (?[T]he SEC is granted ?examination, enforcement and
other rulemaking authority? over funding portals, and presumably retains
authority to enforce the various statutory and regulatory mandates for both
issuers and intermediaries.?).
101. See id. at 1462 (?Crowdfunding transactions cannot be consummated
directly between issuer and investor, but rather must be executed via a financial
intermediary registered with the SEC.?).
102. See Schwartz, Inclusive Crowdfunding, supra note 2, at 669 (?[D]ue to
competing priorities, the SEC missed the deadline and issued only a preliminary
The SEC published 585 pages of proposed regulations in October
2013 and invited public comment thereon.103 Two years later, in
November 2015, the SEC promulgated the final version of
Regulation Crowdfunding, which weighed in at nearly 700
pages.104 Securities crowdfunding under the JOBS Act and
Regulation Crowdfunding finally commenced in May 2016.105
C. Policy Goals: Efficiency and Inclusivity
Congress enacted securities crowdfunding in large part to
benefit entrepreneurs.106 The statute was even called the
Jumpstart Our Business Startups Act! In that law, signed by
President Obama, the government sought to create a public
securities market that would be both efficient and inclusive.107
?Efficient? in the sense of an effective and low-cost method of
raising business capital for startup and other small companies.108
?Inclusive? in the sense of a system that is open to any entrepreneur
who wants to participate?just like in reward crowdfunding.109
proposal in late 2013.?).
103. Crowdfunding, 78 Fed. Reg. 66,428 (proposed Nov. 5, 2013) (to be codified
at 17 C.F.R. pt. 227).
106. See Schwartz, Crowdfunding Securities, supra note 15, at 1466
(?[C]rowdfunding will emerge as an important, low-cost method of raising
business capital from the public, thus expanding the opportunity for
107. See Schwartz, Inclusive Crowdfunding, supra note 2, at 666, 671
(discussing the attention paid to efficiency and inclusivity).
108. See Schwartz, Crowdfunding Securities, supra note 15, at 457 (?[I]t will
liberate startup companies to use peer networks and the Internet to obtain
modest amounts of capital at low cost.?).
109. See Schwartz, Inclusive Crowdfunding, supra note 2, at 671 (?An
inclusive environment, broadly defined as one in which ?all people feel valued and
respected and have access to the same opportunities,? can generate positive
effects.?). There are other policy goals behind crowdfunding, including a wish to
empower retail investors to buy securities that have traditionally been offered to
institutional or accredited investors, but the present work is focused on the
interests of entrepreneurs.
companies drop out before completing the course,289 this acts as an
effective way to separate the wheat from the chaff.
In sum, rather than allowing every entrepreneur to ?have a
go,? the platforms act as strict gatekeepers that only allow a select
few to access the crowd.290 This is efficient, but not inclusive, from
the perspective of an entrepreneur.
Syndication is where the crowd invests alongside a large and
sophisticated ?lead? investor, and is a method borrowed directly
from angel investors.291 Under this model, one ?active? or ?lead?
angel, presumably an expert in the relevant industry, researches
a company and the proposed terms of investment, and then reports
back to the rest of the angels in the group.292 The other angels in
the group play a ?passive? role; they trust in the expertise and
diligence of the lead angel.293
The distinctive legal regime in New Zealand has allowed for
syndication to develop as a key method for privately regulating its
equity crowdfunding market. Unlike the United States (as well as
practically every other country), New Zealand?s crowdfunding law
imposes no cap on the amount an investor may contribute.294 This
was a conscious decision on the part of the government and
specifically designed, at least in part, to facilitate large
(last visited Jan. 11, 2018)
(detailing the site?s training program
for new companies) (on file with the Washington and Lee Law Review).
289. Interview with Barry Grehan, supra note 287.
290. See supra notes 282?289 and accompanying text (noting that the
selectivity is a defining feature of the system).
291. See Dale A. Oesterle, Intermediaries in Internet Offerings: The Future is
Here, 50 WAKE FOREST L. REV. 533, 542 (2015) (?The syndicates shadow trade, as
coinvestors, on the trades of ?lead angels? or ?angel advisers.??).
292. See id. at 542?43 (?[T]he angel takes the lead in identifying the
investment opportunity and negotiating the terms on behalf of their syndicate.?).
293. See id. at 543 (noting that passive investors are able to observe and follow
in the angels? lead).
294. See supra note 217 and accompanying text (stating that the U.S. puts a
cap on the investment to prevent investors from risking more than they can
investments by lead investors and syndication by the rest of the
crowd?just like in traditional angel investing.295
Hence under New Zealand law an angel investor is legally
permitted to invest hundreds of thousands through a
crowdfunding campaign, making it cost-effective to undertake the
burden of acting as a lead investor.296 The lead investor often
makes a very sizable investment herself, sometimes as much as
$500,000 at a time.297 Such an amount would be unlawful under
American law, but it is perfectly legal in New Zealand. In practice,
lead investors have become a very important component of the
equity crowdfunding marketplace.298 Like in an angel group, the
lead investor conducts research on the company and the rest of the
crowd comes along for the ride. Professional investors, including
angels and VCs, sometimes play the role of cornerstone investor.299
They serve to lend credibility to an offer; others take the fact that
someone has bought a large block of shares as a signal that the
company is sound and the valuation is fair.300 Commonly, a lead
investor will arrange in advance to contribute a large sum to a
crowdfunding campaign, thus providing it with momentum from
the first day.
The experience in New Zealand shows that lead or cornerstone
investors have become an important component of the
crowdfunding marketplace.301 As the market has matured, and the
importance of cornerstone investors has become clearer, the
average number of investors in successful campaigns dropped from
152 in the first year to 82 in the second year, and the average
investment amount increased 65%.302 A knowledgeable observer
explained this change as a direct consequence of the participation
of cornerstone investors contributing NZ$100,000 to NZ$400,000
to a single campaign.303
In the United States, syndication is not a viable model for
crowdfunding due to the structure of the securities crowdfunding
law in place there. The JOBS Act places a low legal limit on the
total amount that a person may invest in all crowdfunding
companies each year.304 The upshot is that most Americans are
limited to about $3,000?$5,000 per year or less?and this amount
is not per investment, but rather per year?making it economically
infeasible for any one person to take on the role of lead investor.305
The investor cap is simply too low to make it worthwhile for a lead
angel to spend the time and effort it takes to find an appropriate
investment and conduct adequate due diligence.
On the whole, cornerstone investors are an important
component of the New Zealand equity crowdfunding market. Their
presence is a significant factor in whether an offer will succeed in
investor to lead their offer. . . . To date, only three offers through our
marketplace have failed to reach their minimum investment target.
[T]he one thing all three offers had in common was that they lacked a
credible lead investor for the round.
See also Interview with Hayley Buckley, supra note 218.
302. See Smylie, Crowdfunding Numbers Slump, supra note 248 (noting that
the average investment amount increased 65%).
303. See id. (emphasizing the impact of the presence of a professional
304. See supra note 217 and accompanying text (stating that the average limit
does not exceed $5,000).
305. See 15 U.S.C. ? 77d (2012) (placing limits on amounts sold to investors
per year). The JOBS Act defines the annual investor cap as 5% of the lesser of
one?s annual income or net worth (10% for people with an annual income and net
worth over $100,000, up to an absolute cap of $100,000). Id. Thus, even a wealthy
person of the sort who might act as an angel investor would be legally barred from
making large investments via crowdfunding. Someone with an annual income of
$400,000 and a net worth of $25 million may only legally invest $40,000 per year
(10% of the lesser) in all crowdfunding companies. Even someone with an annual
income of $5 million and a net worth of $1 billion may only invest $100,000 (the
cap) each year. The effect is that wealthy investors effectively cannot participate
in crowdfunding in the manner that they would in a traditional angel group.
reaching its financing goal, both because they contribute a large
sum and because they encourage other investors to participate.306
In this way, they have greatly enhanced the New Zealand equity
crowdfunding market?s efficiency and ability of companies to get
The importance of finding a cornerstone investor, however,
makes New Zealand crowdfunding more exclusive than it would
otherwise be. All else being equal, platforms are more likely to list
a company if it already has a cornerstone investor lined up and
ready to contribute, and less likely if the company lacks such an
investor.307 New Zealand?s market has thus evolved in a manner
that makes it more difficult for those who have trouble finding
traditional investors to get their chance to impress the crowd. In
other words, while syndication does seem to enhance efficiency, it
does so at the cost of inclusivity.
3. Pre-Existing Crowds
The crowdfunding law enacted in the United States expressly
prohibits a company from directly advertising their crowdfund
offering to potential investors.308 The apparent rationale for the
bar on advertising was that Congress wanted people to make their
investing decisions based on the full disclosures mandated under
the law, and feared that advertisements might not include all of
the required information.309 Thus the law does allow issuers to
direct investors to the online funding platform, where they would
find the full set of mandated disclosures.310 The SEC?s regulations
implemented this portion of the JOBS Act by providing that
issuers may publish simple, textual ?tombstone ads? that include
306. See supra notes 282?59 (outlining the benefits of having lead investors).
307. See supra notes 301?306 and accompanying text (discussing how New
Zealand platforms are more selective when choosing companies to offer to
308. See 15 U.S.C. ? 77d-1(b)(2) (?[A]n issuer who offers or sells securities [via
crowdfunding] shall . . . not advertise the terms of the offering, except for notices
which direct investors to the funding portal or broker.?).
309. See Schwartz, Crowdfunding Securities, supra note 15, at 1464 (listing
the information that issuers are required to provide).
310. See 15 U.S.C. ? 77d-1(b)(2) (prohibiting any advertising other than
notices directing investors to the funding portal).
only the terms of the offering and ?direct an investor to the
intermediary?s platform through which the offering is being
conducted, such as through a link.?311
New Zealand?s equity crowdfunding law, in contrast, has no
prohibition or limitation on advertising.312 Rather, the law allows
an issuer to advertise, promote and market its offering as it sees
fit.313 This is an important feature of the FMCA, since it enables
crowdfunding companies to ?activate? their pre-existing crowd of
supporters, such as customers or previous investors, to participate
in the offering. This is an effective way to jumpstart a
crowdfunding campaign and generate momentum off the bat,
which as discussed above is vital to successfully reaching the
all-or-nothing target.314 In other words?and this is hardly
surprising?by advertising its offering to its supporters, a
crowdfunding issuer increases its likelihood of success.
But all of this depends on a company actually having a
pre-existing crowd of supporters ready to invest. What about a
brand-new startup company with no product, no customers and no
ready-made crowd? Those sorts of issuers are much less likely to
generate the early momentum needed to reach the all-or-nothing
target.315 And because they are unlikely to succeed, the gatekeeper
platforms are unlikely to want them on their site. Thus the effect
of the FMCA?s permission to advertise is to help established
companies succeed in their crowdfunding campaigns, and to
marginalize those that lack a pre-existing group of supporters.316
By allowing flashy and exciting advertising and other forms of
marketing, the New Zealand system enhances efficiency by
increasing the success rate of crowdfunding campaigns.317 At the
311. See 17 C.F.R. ? 227.204 (2016) (regulating advertising that offerors may
312. See supra Part II.B (emphasizing that the FMCA is simpler than the
313. See Financial Markets Conduct Act 2013 st 89?94 (N.Z.) (providing
advertising regulations for offers).
314. See supra notes 317?92 (noting strategies to initiate campaign
momentum to create successful crowdfunding).
315. See infra notes 325?93 and accompanying text (discussing the
importance of a strong initial campaign launch).
316. See supra Part II.B (discussing that the FMCA gives crowdfunding
companies great autonomy in conducting offers and advertising).
317. See James Murray, Equity Crowdfunding and Peer-to-Peer Lending in
same time, it also has the effect of excluding entrepreneurs who
are out-of-the-loop and who lack connections?the precise group
that crowdfunding was originally intended to include.318
Consistent with the FMCA?s authorization of advertising, New
Zealand equity crowdfunding platforms prefer to list companies
that already have a strong network or following, such as customers
or prior investors.319 This enhances efficiency, but is not inclusive
in the sense originally advanced in reward crowdfunding and in
the SEC?s preliminary version of Rule 402(b)(1).320 To the contrary,
it excludes those sorts of entrepreneurs who lack connections and
access, those who have not yet tasted success?precisely the group
that was crowdfunding originally intended to help.
Experience in New Zealand and elsewhere shows that
momentum is key to a successful crowdfunding campaign.321 Thus
to generate that momentum, market participants all agree that it
is vital for a campaign to have a pre-arranged set of investors
?ready to pledge in the first few hours the campaign is live.?322 In
the colorful words of one commenter, ?Launching an online equity
offer is like making a movie: everything depends on
pre-production. If your offer doesn?t explode as soon as it goes live,
it?s probably going to limp to the finish line, or die trying. This
means you need to build the buzz before your offer is even live.?323
Thus at Snowball Effect, for instance, ?an average of 15.8% of all
New Zealand: The First Year, 2 JASSA FINSIA J. APPLIED FIN. 1, 7 (2015)
(detailing numerous campaigns experiencing high success rates).
318. See supra Part I.C.2 (emphasizing that crowdfunding is supposed to give
everyone the opportunity to try to raise capital).
319. Interview of Anna Guenther, supra note 288.
320. See supra notes 226?39 (describing the initial proposal as radically
321. See supra note 300 and accompanying text (discussing how investors
lend credibility to an offer).
322. See Promoting 101, PLEDGEME, http://guide.pledgeme.co.nz/promo-1/
(last visited Jan. 8, 2017) (noting how to organize a ?cornerstone crowd? on social
media) (on file with the Washington and Lee Law Review).
323. Steven Male, Ultimate Guide to Marketing Your Equity Crowdfunding
Offer, SNOWBALL EFFECT (May 21, 2015), https://www.snowballeffect.co.nz/blog/
ultimate-guide-to-marketing-your-equity-crowdfunding-offer (last visited Jan. 8,
2017) (on file with the Washington and Lee Law Review).
investment . . . has been pre-arranged before each offer has gone
The only way to generate this sort of ready-to-go interest
(apart from cornerstone investors) is if the issuer already has a
pre-existing crowd of supporters that are willing to invest and
spread the word.325 The platforms count on the issuers to ?activate?
their crowd.326 For example, Invivo Wines, the first company to hit
the NZ$2 million crowdfunding limit, had pledges of over NZ
$770,000 already in place at the start of the crowdfunding
campaign.327 The model relied heavily on the company as opposed
to the platform to raise funds.328 ?If you look
at . . . Invivo . . . they?re going to the market with 20,000 plus
followers on Facebook and they?re who they?re activating for the
funding. . . . Those sorts of networks are really important for the
process to work.?329 Another similar example can be found in
Yeastie Boys, a craft brewer, which raised NZ$500,000 ?in half an
hour following an active social media campaign and investor
information sessions to promote the offer.?330 More generally, an
executive at PledgeMe estimates that about 75% of investors in a
given offering have some sort of pre-existing connection to the
The effect of the need for a pre-existing network is that a
324. Edlin, supra note 300.
325. See Promoting 101, supra note 322 (providing guidance for advertising
crowdfunding campaigns on social media) (on file with the Washington and Lee
Law Review); see also id.
Your First 50 are your champions! Get them ready to pledge in the first
few hours the campaign is live. Ask them to share the fact they?ve
pledged with their networks. Get them to write a blog post for you
about why they pledged and what they hope for your company. Get
them working for you.
326. See id. (advising how to engage individuals on social media to advertise
for a campaign).
327. See Murray, supra note 317, at 7 (demonstrating the largest equity
campaign in New Zealand).
328. See Manning, supra note 285 (noting the strategies of highly successful
329. See id. (quoting David Wallace, founder of a New Zealand equity
330. Murray, supra note 317, at 7.
331. See Interview with Barry Grehan, supra note 287 (discussing the
composition of investors in a typical offering).
company without one is unlikely to reach its financial target and
thus unlikely to be accepted onto a platform in the first place.
Unless you have ?an established business,? ?customers,? and ?a
large network of people who are ready and waiting to spread your
message,? you are probably going to be screened out by the
gatekeeper platforms.332 This is great for efficiency, as it is most
efficient to list only companies that are likely to succeed, but it
fosters an exclusive, not an inclusive, crowdfunding market.333
Individual entrepreneurs have their own reputations to
consider when they launch a crowdfunding campaign. Because
New Zealand is a small country (about the size and population of
a single state), personal connections are never too tenuous?and
the Internet never forgets. If an entrepreneur were to be caught
deceiving the public in her crowdfund listing, her reputation would
be forever marred, with evidence of the wrongdoing etched in
permanent digital form on Facebook and elsewhere. A similar fate
would befall someone who squandered the money she collected
through crowdfunding, whether through shirking or malfeasance.
Knowing all this, crowdfunding entrepreneurs in New Zealand
can be expected to behave themselves both during their campaign
and once they have received the money. This seems to happen in
practice, as there has never been a single funded company that
turned out to be a fraud, and only one company has gone out of
business, since New Zealand began crowdfunding in 2014.334
At the same time, the importance of reputation is contrary to
a desire for inclusivity. In the United States, at least,
crowdfunding was envisioned as a way for unknown
entrepreneurs, meaning those without a reputation in the funding
community, to pitch their idea directly to the public.335 But the
332. See Male, supra note 323 (discussing marketing strategies for
333. See id. (outlining marketing methods to make crowdfunding offers feels
334. See supra notes 267?33 (noting the remarkable absence of fraud in New
Zealand?s crowdfunding campaigns).
335. See supra notes 226?39 (discussing that the U.S. system creates very
New Zealand system benefits entrepreneurs with strong
reputations and punishes those with weak reputations, which is
contrary to the inclusive ideal.
B. Crowdfunding in the United States is Less Efficient but More
Crowdfunding in the United States is less efficient and much
smaller than in New Zealand, as detailed in the last Section.336 One
probable cause of this relative paucity of interest on the part of
entrepreneurs is the high cost of conducting a crowdfunding
offering in the United States.337 When an issuer is limited to
raising only $1 million, it is vital to keep costs very low. In New
Zealand, the law and regulations are liberal and simple, thus
imposing much lower compliance costs than the JOBS Act and
related regulations.338 In the United States, compliance costs are
so high that they prevent many issuers from conducting a
crowdfund offering that makes economic sense.339 If it costs
$40,000 to raise $100,000 through crowdfunding, many companies
few, if any, obstacles for entrepreneurs).
336. See supra Part III.A (providing an overview of the differences in
efficiency between crowdfunding in New Zealand and the U.S.).
337. See Jason W. Parsont, Crowdfunding: The Real and the Illusory
Exemption, 4 HARV. BUS. L. REV. 281, 284?85 (2014)
[The regulatory burden of complying with Title III of the JOBS Act]
will translate into higher legal and accounting fees, higher premiums
on directors and officers liability insurance (?D&O insurance?), and
higher intermediation fees. For a capital raise of $1 million (which is
the maximum in retail crowdfunding), the SEC roughly estimates a
cost of up to $152,260, which may be an underestimation. This could
be prohibitively expensive for many small issuers.
See also Thompson & Langevoort, supra note 83, at 1605 (commenting on the
?costly set of responsibilities? imposed by Title III of the JOBS Act).
338. See Henry William Hillind, Exploiting the Crowd: The New Zealand
Response to Equity Crowd Funding, 21 N.Z. BUS. L.Q. 46, 52 (2015) (noting New
Zealand?s decision to not impose an investor cap as compared to other countries).
339. See Brian Korn, SEC Proposes Crowdfunding Rules, FORBES (Oct. 23,
2013, 2:41 PM),
(last visited Jan. 24, 2018)
high expenses compared to the low maximum amounts that can be raised by a
company and invested by an individual make public equity crowdfunding one of
the costliest forms of (legal) capital raising.?) (on file with the Washington and
Lee Law Review).
will not participate, even if they have good use for $100,000 and
cannot obtain the money elsewhere.
Because New Zealand was focused entirely on efficiency, it
comes as no surprise that New Zealand?s crowdfunding market is
much more successful in economic terms than the one in the
United States.340 But what about inclusivity? The American
system was supposed to achieve that policy goal as well,341 while
New Zealand had no intention of doing so.342 The SEC?s final
version of its crowdfunding regulations, although they allow
platforms to act as gatekeepers,343 still retain other legal rules
designed to create an inclusive market. The final regulations
sharply limit advertising344 and maintain the per-investor cap that
prevents cornerstone investors from playing a role.345 The
remainder of this Section examines the empirical evidence from
the first year of American crowdfunding to determine whether it
has met its policy goal of inclusivity for entrepreneurs.346 As will
be discussed, the evidence on this score is somewhat mixed.
340. See Lloyd Kavanagh, New Zealand: The Equity Crowdfunding
Revolution, MINTERELLISONRUDDWATTS (Oct. 11, 2017), https://minterellison.co.
(last visited Jan.
(providing data on the first three years of crowdfunding in New Zealand
compared to the first year in the United States and citing an earlier draft of the
present article) (on file with the Washington and Lee Law Review).
341. See supra Part II.C.2 (discussing the use of securities crowdfunding as a
means of promoting inclusive entrepreneurship).
342. See supra Part III.C (identifying efficiency as the singular goal of New
Zealand?s crowdfunding law).
343. See supra Part III.D (discussing the ways in which the SEC attempted
to balance the goals of inclusivity and efficiency in the finalized regulations).
344. See Max E. Isaacson, The So-Called Democratization of Capital Markets:
Why Title III of the JOBS Act Fails to Fulfill the Promise of Crowdfunding, 20
N.C. BANKING INST. 439, 459?61 (2016) (discussing the key advertising limitations
of the JOBS Act).
345. See id. at 454?55 (discussing the potential negative impacts of the
346. Some of the data in this Part is based on statistics from the first 7.5
months of crowdfunding in the United States, namely from May 16, 2016, through
the end of that calendar year. See VLADIMIR IVANOV & ANZHELA KNYAZEVA, U.S.
SECURITIES-BASED CROWDFUNDING UNDER TITLE III OF THE JOBS ACT 1 (2017),
(setting forth evidence on initial crowdfunding activity in the period immediately
after the new regulations became effective); Sherwood Neiss, Here?s How
Regulation Crowdfunding Performed in 2016, VENTURE BEAT (Jan. 11, 2017, 5:05
Like in New Zealand, crowdfunding platforms in the United
States may screen, curate and otherwise exclude companies based
on the platform?s subjective view of the merits of the investment.347
To get listed on a crowdfunding site in the United States,
entrepreneurs must first prove their worth to the gatekeeper (the
platform) who has a financial incentive to only open the gate for
the most promising companies.348 Even so, American crowdfunding
has become a fairly inclusive market from the standpoint of
entrepreneurs. Despite the ability of American crowdfunding
platforms to act as gatekeepers, there is substantial evidence to
indicate that platforms are relatively liberal in deciding whom to
present to the crowd.
In particular, very young startup companies without a track
record, without a crowd of pre-existing investors or customers, and
even without any assets, are in fact given a chance to pitch to the
crowd.349 The typical crowdfunding company in the United States
is so young as to be brand new. About 40% are less than one year
old,350 and 20% are less than three months old. The median age of
a crowdfunding company in the United States is just eighteen
months, and the average age is two years.351 In New Zealand, by
contrast, the average crowdfunding issuer is eight years old.352
Consistent with the goal of inclusivity, American crowdfunding
platforms are much more welcoming to brand-new, untested
startups, whereas New Zealand gatekeepers are more likely to list
(last visited Jan. 11, 2018)
(providing data concerning the
immediate impact of the JOBS Act crowdfunding regulations) (on file with the
Washington and Lee Law Review) .
347. See Ibrahim, supra note 130, at 1496?99 (discussing the importance of
allowing crowdfunding platforms to regulate fundraising activities).
348. See 17 C.F.R. ? 227.402(b)(1) (2017) (granting discretion to funding
portals to determine which issuers to include on their platforms).
349. See IVANOV & KNYAZEVA, supra note 346, at 13 (?[T]he typical
[crowdfunding] issuer is a small, young startup.?).
350. CCA Regulation Crowdfunding Indices, supra note 256 (focusing on
Chart 11, which provides the total amount of committed capital to all campaigns
raising funds under Regulation Crowdfunding since May 16, 2016).
351. See IVANOV & KNYAZEVA, supra note 346, at 13?14 (noting that these ages
are based ?on the initial filing relative to the date of incorporation?).
In the same vein, the median crowdfunding company in the
United States had just three employees and $43,000 in assets, and
one-quarter of issuers had no assets at all.353 The majority (60%)
of American companies had no revenue, and almost all (91%) were
not profitable, when they undertook a crowdfunding campaign.354
Most successful crowdfunding campaigns in the United States
raised less than $200,000, with dozens raising under $100,000.355
The median amount raised was about $170,000.356 These numbers
indicate that American crowdfunding has attracted tiny startups
of the sort that are not generally listed on New Zealand
crowdfunding platforms, but which are given their chance in the
inclusive American system.
In addition, only about 10% of American crowdfunding
companies have previous investors, such as VCs or angel
investors.357 For the other 90% of issuers, ?crowdfunding [is] their
initial foray into capital raising through a securities offering.?358
Recall that in New Zealand, platforms tend to prefer companies
that already have a pre-existing investor base.359 This is another
indicator that crowdfunding in the United States is achieving its
goal of including all entrepreneurs, even those ?out of the loop.?
One final indicator of the inclusive nature of American
crowdfunding is the fact that crowdfunding campaigns in the
United States have a much lower success rate than in New
Zealand. Recall that New Zealand platforms generally try to only
353. See id. (noting that the average issuer had five employees and held
approximately $327,000 in assets).
354. See id. at 14 (?The median offering involved an issuer with 3 employees
and approximately $43,000 in assets . . . .?).
355. See 183 Reg CF Companies Have Hit Their Funding Target, WEFUNDER,
(last visited Jan. 12, 2018)
(providing data on
company funding targets as of May 16, 2017) (on file with the Washington and
Lee Law Review); see also IVANOV & KNYAZEVA, supra note 346, at 19 (describing
the characteristics of issuers that reported success and those that did not report
356. See IVANOV & KNYAZEVA, supra note 346, at 1 (?[T]he median (average)
amount raised was approximately $171,000 ($303,000).?).
357. Id. at 15.
358. See id. at 15 (highlighting evidence that ?some issuers had previously or
subsequently conducted an offering under Regulation D or Regulation A?).
359. See supra Part IV.A.3 (discussing the ways in which New Zealand?s
crowdfunding laws promote efficiency by favoring established companies, while
marginalizing those without a pre-existing base of supporters).
list companies that they expect to succeed in reaching their
financial target, leading to a success rate of about 80%.360
American crowdfunding campaigns, by contrast, succeed about
50% of the time.361 This statistical disparity was previously used
to show that New Zealand has a more efficient crowdfunding
market than does the United States (which it does).362 But it also
shows that American crowdfunding platforms are relatively liberal
and inclusive when deciding which companies to list on their sites.
Based on all of these statistics, the SEC has concluded that
American crowdfunding is fulfilling its inclusive goal of ?providing
a new source of capital for entrepreneurial and small businesses
that may not otherwise have had access to capital.?363 Even so,
other evidence from the first year of American crowdfunding
indicate that the system may not be quite as inclusive as was
In terms of geography, there are certain, well-known hubs of
venture capital and angel investment, led by Silicon Valley in
California, as well as New York City, Boston, and Austin, Texas.365
The traditional way for an entrepreneur to access those pools of
capital was to physically travel or relocate to one of those places.366
360. See supra Part IV.A.1 (discussing the gatekeeping role that New Zealand
crowdfunding platforms play in excluding companies that are unlikely to
361. See supra notes 246?259 and accompanying text (discussing the
differences in the first-year success rates of equity crowdfunding between New
Zealand and the United States).
362. See supra Part IV.A.1 (explaining the methods used by New Zealand
crowdfunding platforms in their gatekeeping role to promote selectivity and
363. IVANOV & KNYAZEVA, supra note 346, at 16.
364. See supra notes 121?131 and accompanying text (discussing the policy
rationales behind the United States? goal of inclusivity in crowdfunding
365. See Schwartz, Rural Crowdfunding, supra note 123, at 286 (noting that
most venture capital firms tend to be concentrated in metropolitan locales, and
angel investors are generally found in ?urban oases among rural regions).
See id. at 284
The upshot is that an entrepreneur with big dreams is still given the
same advice today that Horace Greely is said to have offered in the late
1800s: ?Go west, young man, go west!? The conventional thinking is
that the ambitious among us must physically relocate from one part of
the country to another in order to find early-stage business financing.
Even for rural entrepreneurs that would prefer to remain in, say, Iowa,
American crowdfunding under the JOBS Act was a way ?to bring
venture capital to rural areas. By allowing rural entrepreneurs to
connect with and obtain financing from angel investors on the
Internet, crowdfunding frees them from the geographic constraint
that has long hindered entrepreneurship in rural areas.?367
In practice, as crowdfunding has developed, this
transcendence of geography occurred, but only to a modest extent.
As might have been expected, the geographic distribution of
crowdfunding issuers is dominated by California, with about
one-third of all crowdfunding offerings coming from issuers based
in that state.368 New York, Texas, and Florida all have significant
numbers of crowdfunding offerings, but they each account for only
about one-fifth the number of issuers as California.369 This comes
as no surprise, as those four boast the largest populations of all the
states.370 When it comes to successful fundraising totals, California
also leads the pack, with more than triple its closest competitor,
Texas, and more than five times the state in third place,
At first blush, crowdfunding appears to have replicated the
existing geographic centers of venture finance in Silicon Valley,
Austin and Boston. Furthermore, at least fourteen states have not
had a single local company even attempt to raise money in this
way.372 And this group of states?Iowa, the Dakotas, West Virginia
rather than move to California, the siren song of wealthy and
experienced angel investors is near impossible to resist. You can?t keep
the kid on the farm, as they say.
367. Id. at 292?93.
368. See IVANOV & KNYAZEVA, supra note 346, at 18 (noting that California
also led in the target amount sought, the number of offerings reported complete,
and the amount reported raised).
369. See id. at 18 (noting that New York had the second most offerings, with
9% of the total).
370. See Idaho is Nation?s Fastest-Growing State, Census Bureau Reports,
U.S. CENSUS BUREAU (Dec. 20, 2017),
(last visited Jan. 12, 2018)
California is the largest state by population with an estimated 39,536,653
residents, followed by Texas (28,304,596), Florida (20,984,400), and New York
(19,849,399)) (on file with the Washington and Lee Law Review).
371. See CCA Regulation Crowdfunding Indices, supra note 256 (focusing on
372. See id. (focusing on Chart 8, which shows zero offerings from
Washington, Montana, Wyoming, North Dakota, South Dakota, Kansas,
and others?is closely correlated with the rural areas who were
supposed to benefit from crowdfunding?s ability to overcome
On the other hand, a solid majority of the states have seen
their companies launch crowdfunding campaigns, and this
includes many states that are largely off the radar of traditional
VCs and angel investors, such as Idaho, New Mexico and South
Carolina.374 To cherry-pick one example, Alabama-based
companies raised nearly as much as Colorado-based companies in
the first year of crowdfunding.375 In the end, although it obviously
has not transformed Bismarck into Boston, or Pine Bluff into Palo
Alto, crowdfunding has in fact achieved some real amount of
Beyond geography, crowdfunding also shows modest success
when it comes to demographic inclusivity. It has been well
documented that women and minorities have very little success in
attracting traditional methods of startup finance, namely venture
capital and angel investment.376 To offer just one statistic, only 8%
of companies that receive venture capital investment have female
founders.377 Crowdfunding was supposed to help ameliorate this
disparity by allowing all entrepreneurs, of every demographic
stripe, to pitch their idea to the crowd for funding.378
Nebraska, Oklahoma, Iowa, Arkansas, Wisconsin, Kentucky, West Virginia, and
373. See Schwartz, Rural Crowdfunding, supra note 123, at 292?93
(discussing the increased access to investors that securities crowdfunding has
brought to rural entrepreneurs).
374. See CCA Regulation Crowdfunding Indices, supra note 256 (focusing on
375. See id. (finding that Colorado-based companies raised $933,000 and
Alabama-based companies raised $825,000).
376. See Schwartz, Digital Shareholder, supra note 9, at 622?23 (noting the
?severe lack of access to startup financing? for women and racial minorities).
377. See Habib Jamal, Crowdfunding?s Potential for Minority and Women
Owned Enterprises, CROWDFUND CAP. ADVISORS (July 28, 2014),
(last visited Jan. 11, 2018)
?41% of businesses are women owned, but only 8% of ventures that are backed by
professional investors are founded by women?) (on file with the Washington and
Lee Law Review).
378. See Schwartz, Digital Shareholder, supra note 9, at 623 (?Crowdfunding
offers a new and inclusive way to bring needed financing to startups all across
America, from coast to coast, in rural areas and urban, to entrepreneurs rich and
To some extent, this has happened. Companies with at least
one female founder represented about 20% of American
crowdfunding campaigns, and nearly 90% of companies founded by
women-only teams were successfully funded.379 Although the
absolute numbers for this latter statistic were quite small (seven
of eight), these statistics are encouraging.380 At the same time,
further statistical analysis would be needed to fully answer
whether crowdfunding is succeeding in its goal of providing a
demographically inclusive form of entrepreneurial finance.381 For
now, it appears that crowdfunding has been at least somewhat
successful in giving entrepreneurs of every demographic group a
fair chance to obtain financing.382
Overall, American crowdfunding has achieved substantial
success in creating an inclusive environment for entrepreneurs,
especially as compared to New Zealand. Brand-new companies
with nothing but an idea are given a chance to try to convince the
crowd to fund their business, and the market is also fairly inclusive
in terms of geography and demography.
poor, young and old, men and women of every race, ethnicity, and religion.?);
Jamal, supra note 377 (providing evidence on the reality of crowdfund investing
for women and minorities).
379. See Women and Minorities in Regulation Crowdfunding, CROWDFUND
CAP. ADVISORS (May 4, 2017),
(last visited Jan. 11, 2018)
companies with only male founders had a 41% success rate) (on file with the
Washington and Lee Law Review).
380. See id. (providing data showing that 68 out of 165 companies founded by
white men were successful).
381. Cf. John R. Becker-Blease & Jeffrey E. Sohl, Do Women-Owned
Businesses Have Equal Access to Angel Capital?, 22 J. BUS. VENTURING 503, 504
(2007) (reporting on survey finding that only 9% of proposals presented to angel
investors came from women entrepreneurs).
382. One demographic group that should, in theory, benefit by an inclusive
system of crowdfunding is youthful entrepreneurs. See Schwartz, Teenage
Crowdfunding, supra note 125, at 516 (?Teenagers, being experts at Facebook,
Snapchat, Twitter, Instagram and such, are very well positioned to take
advantage of the online securities exemption that the [JOBS] Act
creates. . . . [S]ecurities crowdfunding may well develop into an important
funding source for financing teenage startup companies . . . .?). This aspect of
demographic inclusivity is not addressed because the author is unaware of any
statistics or data showing the extent to which young entrepreneurs have sought
to finance their companies via crowdfunding.
V. Inclusive Crowdfunding is a Luxury
The divergent laws, regulations, policy goals and practical
results of crowdfunding in the United States and New Zealand
teach that there is a trade-off between inclusivity and efficiency.383
The American system is more inclusive, but less efficient; the New
Zealand system is more efficient, but less inclusive. This is an
important lesson, especially for the many countries around the
world presently in the process of drafting and implementing their
own crowdfunding laws, such as Australia, which enacted its law
in March 2017, which is scheduled to go into effect in September
2017.384 It is also highly relevant to those countries, including the
United States, that are considering whether and how to reform the
crowdfunding laws they currently have in place.385
The evidence and analysis discussed in this Article indicate
that the original concept for securities crowdfunding, where every
entrepreneur would get the chance to pitch her idea to the crowd,
is probably too inefficient to function.386 The gatekeeper model,
which was adopted from the outset in New Zealand and belatedly
in the United States, seems clearly to be more efficient for all
participants in the market, both in theory and in practice.387 But it
is also exclusive by its nature because it relies on intermediaries
to curate their listings and exclude many companies who request
access to the crowd.
The upshot is that policymakers around the world need to
think carefully about which policy goal they are trying to achieve?
inclusivity or efficiency?and design their crowdfunding market
accordingly. It may be possible to achieve both goals, but the
383. See supra notes 337?364 and accompanying text (comparing New
Zealand?s focus on efficiency with the United States? concern for inclusivity in
384. See, e.g., Corporations Amendment (Crowd-Sourced Funding) Act 2017
(Cth) (Austl.) (codifying Australian crowdfunding law, enacted on March 28,
385. See, e.g., Financial Choice Act of 2017, H.R. 10, 115th Cong. ?? 476?479
(2017) (proposing legislation altering current crowdfunding laws).
386. See Ibrahim, supra note 130, at 1506 (?True crowd-based investing was
always a fantasy.?).
387. See supra Part IV.A (discussing the steps New Zealand has taken to
ensure efficiency in their crowdfunding market); see also Ibrahim, supra note 130,
at 1499 (calling for even ?more curation? in crowdfunding (emphasis in original)).
experience in the United States is not encouraging on that front.388
In going for both at the same time, the American system ended up
being only weakly inclusive, and not very efficient.389 It is possible
that a different set of laws could have worked better to promote
both inclusivity and efficiency at the same time, but the most
immediate lesson seems to be that a crowdfunding market will
work best if a clear choice between one and the other is made.
So which to choose? It seems that the most important
consideration for policymakers deciding whether to enact an
efficient crowdfunding regime, or an inclusive one, is whether their
jurisdiction already has an effective source of early stage venture
capital.390 If a country has a deep and well-functioning set of VC
funds and angel investors that are available to finance promising
startup companies, then it can afford to design a relatively
inefficient crowdfunding market as an inclusive complement to
that source of capital. On the other hand, if a country lacks VC
funds and angel investors, and therefore needs a new and
significant source of early stage capital, it should try to create an
efficient system for crowdfunding; inclusivity is a luxury it cannot
This suggested decision-making process is consistent with
what we have seen happening over the past few years around the
world. Countries with shallow pools of VC and angel investment
have tried to enact efficient crowdfunding regimes that would
serve as a substitute source of capital for its startup companies.
And countries with deep pools of VC and angel investment have
adopted inclusive and inefficient crowdfunding laws?or have not
even adopted a crowdfunding law at all.391
388. See supra notes 349?352 and accompanying text (discussing the
crowdfunding considerations that allow for an inclusive market).
389. See supra Part II.D (reviewing the regulatory history of crowdfunding in
the United States and the tension between efficiency and inclusivity).
390. See supra notes 225?234 and accompanying text (noting the difference
in the levels of pre-existing early stage venture capital between the United States
and New Zealand).
391. See generally AYAL SHENHAV & GAL HOFFMAN, EUROPEAN CROWDFUNDING
NETWORK, REVIEW OF CROWDFUNDING REGULATION: INTERPRETATIONS OF EXISTING
REGULATION CONCERNING CROWDFUNDING IN EUROPE, NORTH AMERICA AND ISRAEL
http://eurocrowd.winball2.de/wp-content/blogs.dir/sites/85/2014/12/ECNReview-of-Crowdfunding-Regulation-2014.pdf (providing an overview of the
crowdfunding market and regulations in twenty-nine countries across Europe
Two countries stand out as having far and away the deepest
pools of entrepreneurial capital (measured by percentage of
venture capital as a percentage of GDP): Israel and the United
States.392 These countries do not ?need? crowdfunding to fund their
promising startup companies.393 They can afford to enact a
crowdfunding law that is designed to be inclusive, even at the
expense of efficiency, or even decline to pass a crowdfunding law
in the first place. Thus the United States, as discussed above,
adopted an inclusive crowdfunding regime that suffers from
inefficiency, and Israel has yet to enact any sort of crowdfunding
law at all.394 Going forward, the United States should consider
amending the JOBS Act to achieve greater inclusivity among
crowdfunding entrepreneurs, even at the cost of efficiency. We can
Other countries have few VCs and angels and thus really need
some new and efficient means of channeling capital to promising
early stage startup companies. Examples of these sorts of countries
are Italy and New Zealand. Scaled for the size of its economy,
Italy?s venture capital activity amounts to less than 1% of the
United States, the lowest in Western Europe; the relevant
percentage for New Zealand is 8%.395 It should come as no surprise
that these countries would be quick to enact securities
crowdfunding laws. The New Zealand experience was discussed in
and North America, as well as Israel).
392. See Entrepenuership at a Glance 2016: Venture Capital Investments as a
Percentage of GDP: Percentage, 2015, or Latest Available Year, OECDILIBRARY
http://www.oecd-ilibrary.org/industry-and-services/entrepreneurship-ata-glance-2016/venture-capital-investments-as-a-percentage-ofgdp_entrepreneur_aag-2016-graph119-en (last updated Sept. 28, 2016)
visited Jan. 12, 2018)
[hereinafter Venture Capital] (providing data on venture
capital investments as a percentage of gross domestic product for thirty-two
countries) (on file with the Washington and Lee Law Review).
393. See id. (noting the significant drop off in late stage venture funding
between the United States and Israel and the rest of the surveyed countries).
394. See SHENHAV & HOFFMAN, supra note 391, at 130 (discussing proposed
crowdfunding legislation in Israel). Reports indicate that the Israeli government
is in the process of enacting regulations to cover equity crowdfunding. See Is
Equity Crowdfunding right for you, VCFORU,
(last visited Jan. 11, 2018)
(reporting that on ?March 20, 2017 the
Israeli Government passed a new regulation on equity crowdfunding?) (on file
with the Washington and Lee Law Review).
395. Venture Capital, supra note 392.
detail above, and a similar story unfolded in Italy.396
Italy was the first in the world to enact a securities
crowdfunding law, outpacing even New Zealand.397 Italy?s
legislation was passed in 2012 and went into effect in 2013, and it
had several features consistent with a policy goal of creating an
efficient source of entrepreneurial capital, including a legal
requirement that issuers be ?innovative start-up? companies, and
that every issuance be led by a professional cornerstone investor.398
Furthermore, when Italy?s crowdfunding law did not lead to as
much investment as the government had hoped, it went back to
the drawing board and issued a revised law in 2016.399 Italy is
understandably trying to make its crowdfunding system more
efficient, because the country desperately needs it to fill in for the
absence of VC and angel investors.
In sum, the key question for policymakers around the world
deciding on a new or revised crowdfunding law is whether their
country needs equity crowdfunding as a substitute for VC and
angel investment, or if it can afford to have crowdfunding serve as
a complement to existing VC and angel financing. Countries that
already possess sufficient pools of entrepreneurial capital can
afford to undermine the efficiency of their crowdfunding regime by
trying to make it inclusive. But countries that lack satisfactory
levels of startup finance cannot afford that luxury; they need to
follow New Zealand?s lead and focus exclusively on efficiency, at
the cost of inclusivity.
396. See supra Part III.B (discussing New Zealand?s reaction to the United
States JOBS Act through crowdfunding regulations).
397. See Blair Bowman, A Comparative Analysis of Crowdfunding Regulation
in the United States and Italy, 33 WIS. INT?L L. J. 318, 332 (2015) (reporting that
Italy enacted the ?world?s first equity crowdfunding law, the Decreto Crescita
Bis,? in 2012).
398. See id. at 339?41 (discussing the bars to participation in equity
crowdfunding in Italy).
399. See Italy Opens Up Equity Crowdfunding to All Kinds of SMEs,
EUROPEAN CROWDFUNDING NETWORK (Dec. 13, 2016),
(last visited Jan. 25, 2018)
(noting that the new Italian law allows ?any SME to
raise funds via equity crowdfunding?) (on file with the Washington and Lee Law
This Article provided a theoretical and empirical study of
securities crowdfunding in the United States and New Zealand. It
analyzed the origins, the legislation, and the regulation of
crowdfunding in the two jurisdictions,400 and provided data on the
first year of practical experience in each country.401 To a significant
degree, the policy goals in each country have been achieved.402
The law in the United States was designed to create a market
that is both inclusive and efficient, and in practice it has achieved
a little of each.403 American crowdfunding welcomes all types of
investors and has created a space for a broad swath of
entrepreneurs to pitch their ideas to the crowd.404 At the same
time, the market has not been a huge financial impact, having
raised just $35 million across all companies in its first year.405
The law in New Zealand was designed for efficiency only and
it has achieved its goal in practice.406 Crowdfunding companies in
New Zealand have conducted thirteen times as many campaigns
and raised thirty times as much capital than their counterparts in
the United States, with a much higher success rate.407 Unlike in
the United States, the New Zealand market is not particularly
400. See supra Part II.A?B (describing the foundations and regulations of
crowdfunding regulation in the United States); supra Part III.A?B (describing
New Zealand?s crowdfunding regulations and comparing them to those in the
401. See supra Part IV (comparing the results of the first year of crowdfunding
regulations in the United States and New Zealand).
402. See supra Part II.C (discussing the United States? policy goals in
crowdfunding regulation); supra Part III.C (describing New Zealand?s policy goals
and the results of crowdfunding regulation).
403. See supra Part II.C (describing the steps taken by the United States to
ensure a crowdfunding market that is both efficient and inclusive).
404. See supra notes 376?382 (discussing the impact of equity crowdfunding
regulations on female and minority entrepreneurs).
405. See The Current Status of Regulation Crowdfunding, WEFUNDER,
(last visited Jan. 25, 2018)
(noting that as of January
25, 2018 investors had funded $56,106,031) (on file with the Washington and Lee
406. See supra Part III.C (discussing New Zealand?s policy goals of efficiency
in crowdfunding regulations).
407. See supra notes 246?259 (comparing the first-year success rates of
crowdfunding in New Zealand and the United States).
inclusive, especially of entrepreneurs, but then it was never
designed to be.408
The broader lesson for countries around the world in the
process of designing or reforming their own crowdfunding laws is
that they should decide whether they are trying to create an
inclusive system, an efficient system, or if they are trying to
balance the two. Once they settle upon their policy goals, they can
craft their laws accordingly, using New Zealand or the United
States as a model. Countries that lack a deep pool of
entrepreneurial finance (like New Zealand) should probably focus
on efficiency, while countries that already have a mature market
for VC and angel investment (like the United States) can afford to
try for both goals at once.
II. Securities Crowdfunding in the United States .............. 893? A. Precursor: Reward Crowdfunding ............................ 893? B . Crowdfunding Under the JOBS Act ......................... 897? C. Policy Goals: Efficiency and Inclusivity.................... 903? 1 . Efficient Capital Raising ..................................... 904? 2 . Inclusive Entrepreneurship ................................ 905? D. Tension Between Inclusivity and Efficiency-Regulatory History ................................ 907 ?
III. Equity Crowdfunding in New Zealand . .......................... 914? A. New Zealand as Comparator..................................... 914? B. Crowdfunding Under the FMC ................................. 919? C. Policy Goal: Efficiency ( and Not Inclusivity)............ 921 ?
IV. Efficient Versus Inclusive Crowdfunding: A Comparative Analysis of New Zealand and the United States ............................................................. 926? A. Crowdfunding in New Zealand is More Efficient but Less Inclusive....................................... 926? 1 . Gatekeepers.......................................................... 931? 2 . Syndication........................................................... 934? 3 . Pre-Existing Crowds ............................................ 937? 4 . Reputation............................................................ 941? B . Crowdfunding in the United States is Less Efficient but More Inclusive...................................... 942
V. Inclusive Crowdfunding is a Luxury............................... 950 ?
VI. Conclusion ........................................................................ 954 65 . See id. at 884 (stating that securities must be registered ). 66 . Jumpstart Our Business Startups Act , Pub. L. No. 112 - 106 , 126 Stat.
306 ( 2012 ) (codified at 15 U .S.C. ?? 77a - 77r , 78a - 78o ( 2012 )) ; see Scwhartz,
Inclusive Crowdfunding , supra note 2 , at 663 (? Retail crowdfunding is exempt
longstanding intrastate exemption.?) . 67 . See Scwhartz , Inclusive Crowdfunding, supra note 2 , at 669 (?[R]oughly
Tennessee , and Texas.?). 68 . See Schwartz , Crowdfunding Securities, supra note 15 , at 1458 (?[T]he
a traditional IPO . . . .?). 69 . See id. at 1467 (? By offering starkly lower compliance and promotion
capital from the public for small entrepreneurs . ?) . 70 . See Heminway & Hoffman, supra note 64, at 918 ( noting that ordinary
securities must be registered before distributed) . 71 . See Schwartz , Crowdfunding Securities, supra note 15, at 1466
(?[R]equir[ing] that the issuer provide full and clear disclosure of the risks and 295. See Interview with James Hartley, supra note 198 (noting the
similarities to angel investing) . 296 . See Oesterle, supra note 291 , at 543 (? The lead angels' or angel advisers'
of the syndicate returns . ?) . 297 . Interview with Simeon Burnett , supra note 219 . 298. Id . 299 . See Smylie , Crowdfunding Numbers Slump, supra note 248 (describing
Manning , supra note 285 ( ?We're seeing some angels and VCs integrating equity
crowdfunding as a step in their investment strategy . ?) . 300 . See Shaun Edlin, Pre-arranged Capital and Momentum: Is Real Money
Being Raised Through Online Marketplaces? , SNOWBALL EFFECT (Aug. 24 , 2016 ),
(last visited Jan . 11 , 2018 ) (noting that a lead investor helps validate the offer
with Simeon Burnett, supra note 219 . 301. See Edlin, supra note 300 We encourage companies raising through Snowball to seek a credible