The Gatekeepers of Crowdfunding

Washington and Lee Law Review, Nov 2018

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 crowdfunding. 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 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.

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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 crowdfunding. 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 New Zealand. 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. I. Introduction 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 crowdfunding.9 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/ faq/kickstarter%20basics (last visited Jan. 11, 2018) (answering basic questions about Kickstarter and its policies) (on file with the Washington and Lee Law Review). 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 final rule). 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 dollar amount.?). 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 the site.23 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 efficiency). 20. See infra Part III.C (stating that New Zealand seeks the utmost efficiency). 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 gatekeeping). 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 society.39 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 else.?). 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 the SEC). 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 changes hands.48 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 2009.49 46. backing). KICKSTARTER, https://www.kickstarter.com/help/handbook/rewards (last visited 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 choose.?). 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 (last visited Jan. 11, 2018) (describing ?flexible funding?) (on file with the Washington and Lee Law Review). 49. See Kickstarter Stats, KICKSTARTER, https://www.kickstarter.com/help/ stats (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 funded.53 (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/ creator+questions (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, https://www.kickstarter.com/rules/prohibited (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, https://www.kickstarter.com/help/faq/creator+questions (last visited Jan. 11, 2018) (?[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, https://www.gofundme.com (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 Kickstarter). 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 they are.?). 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?, INDIEGOGO, https://support.indiegogo.com/hc/en-us/articles/205138007-ChooseYour-Funding-Type-Can-I-Keep-My-Money- (last visited Jan. 11, 2018) (stating 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 projects). 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 Social Enterprise]. 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 authorities.?). 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 companies.76 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 low.?). 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 raising capital). 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 expensive.80 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.?). 80. 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 crowdfunding companies). 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 a transaction). 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 the process). 91. See id. at 1464 (?Issuers are prohibited from advertising the offering themselves, and any solicitation of the offering must go through the registered funding portal.?). 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 family member.98 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 entrepreneurship.?). 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. 2. Syndication 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 crowdfundingu (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 afford). 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 investor). 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 funded. 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 investors). 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 issue). 312. See supra Part II.B (emphasizing that the FMCA is simpler than the JOBS Act). 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 inclusive). 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 live.?324 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 company.331 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 crowdfunding companies). 329. See id. (quoting David Wallace, founder of a New Zealand equity crowdfunding platform). 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 4. Reputation 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 crowdfunding offers). 333. See id. (outlining marketing methods to make crowdfunding offers feels exclusive). 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 Inclusive 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), https://www.forbes.com/sites/deborahljacobs/2013/10/23/secproposes-crowdfunding-rules/#637b9f77f6bd (last visited Jan. 24, 2018) (?The 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. nz/our-view/new-zealand-the-equity-crowdfunding-revolution (last visited Jan. 24, 2018) (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 funding cap). 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), https://www.sec.gov/dera/staff-papers/white-papers/RegCF_WhitePaper.pdf (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 PM), https://venturebeat.com/2017/01/11/heres-how-regulation-crowdfunding 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 established companies. performed-in-2016/ (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?). 352. Id. 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, https://wefunder.com/stats/all (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 success). 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 originally hoped.364 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 succeed). 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 efficiency). 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 regulations). 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, Massachusetts.371 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), https://www.census.gov/newsroom/pressreleases/2017/estimates-idaho.html (last visited Jan. 12, 2018) (finding that 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 Chart 9). 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 geography.373 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 geographic inclusivity. 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 Virginia). 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 Chart 8). 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), https://www.scribd.com/document/235308665/Crowdfunding-s-Potential-forMinority-and-Women-Owned-Enterprises (last visited Jan. 11, 2018) (noting that ?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), http://crowdfundcapitaladvisors.com/womenminorities-regulation-crowdfunding/ (last visited Jan. 11, 2018) (noting that 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 crowdfunding policies). 384. See, e.g., Corporations Amendment (Crowd-Sourced Funding) Act 2017 (Cth) (Austl.) (codifying Australian crowdfunding law, enacted on March 28, 2017). 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 afford. 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 (2014), 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 afford it. 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 (2016), 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) (last 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, https://www.vcforu.com/equitycrowdfunding (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), http://eurocrowd.org/2016/12/13/italy-opens-equity-crowdfunding-kind-smes/ (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 Review). VI. Conclusion 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 United States). 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, https://wefunder.com/stats (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 Law Review). 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


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Andrew A. Schwartz. The Gatekeepers of Crowdfunding, Washington and Lee Law Review, 2018,