The Social Network and the Crowdfund Act: Zuckerberg, Saverin and Venture Capitalists' Dilution of the Crowd

49 Pages Posted: 7 Sep 2012 Last revised: 8 Oct 2016

See all articles by Jack Wroldsen

Jack Wroldsen

California Polytechnic State University

Date Written: December 28, 2012


By virtue of Title III of the JOBS Act, signed into law on April 5, 2012, crowdfunding could become a powerful, even revolutionary, force to finance start-up companies. It democratizes entrepreneurs’ access to seed capital and converts the masses of Internet users into potential retail venture capitalists. Many have cautioned, though, that crowdfunding poses serious investment risks of start-up companies failing, committing fraud, and being mismanaged. Accordingly, the JOBS Act includes numerous disclosure obligations designed to mitigate such downside risks.

But what has been overlooked, and what this Article analyzes from a venture capitalist perspective, is that even if a crowdfunded start-up company is successful, crowdfunding investors can lose the value of their investment if they lack venture capital legal protections. When successful start-up companies raise additional funds from professional venture capitalists, the value of ground-floor investments can be severely diluted, as colorfully dramatized in The Social Network. In addition, when crowdfunded companies are acquired in private transactions, crowdfunders are at risk of being left out.

Therefore, under a “qualitative mandates” regulatory philosophy that moves beyond securities law’s status-quo disclosure requirements, this Article proposes substantive venture capitalist protections for crowdfunding investors, such as down-round anti-dilution, tag-along, and preemptive rights, to help safeguard the value of early-stage investments in successful start-up companies. Especially because many crowdfunding investors are likely to be inexperienced and unsophisticated in start-up-company investing, crowdfunding laws and regulations should go beyond disclosure requirements that warn investors of danger (to the extent investors even read or understand the disclosures) to help crowdfunders obtain market-based economic protections characteristic of venture capitalist investment contracts.

Keywords: Crowdfund Act, JOBS Act, Crowdfunding, Securities

Suggested Citation

Wroldsen, Jack, The Social Network and the Crowdfund Act: Zuckerberg, Saverin and Venture Capitalists' Dilution of the Crowd (December 28, 2012). 15 Vanderbilt Journal of Entertainment & Technology Law 583 (2013), Available at SSRN:

Jack Wroldsen (Contact Author)

California Polytechnic State University ( email )

Orfalea College of Business
San Luis Obispo, CA 93407
United States

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