Democratizing Entrepreneurship: An Overview of the Past, Present, and Future of Crowdfunding
Zachary D. Kaufman
Yale University - Law School; Harvard University - Harvard Kennedy School (HKS)
Theodore W. Kassinger
O'Melveny & Myers LLP
Heather L. Traeger
O'Melveny & Myers LLP
February 4, 2013
Bloomberg BNA Securities Regulation & Law Report, Volume 45, Number 5: 208-217, February 2013
Entrepreneurs face challenges raising capital to fund the development of new ideas in the United States because of regulatory constraints, primarily those imposed by the Securities Act of 1933 (“Securities Act”). Although avenues exist for entrepreneurs to seek financing, funders typically hold the purse strings tightly and release them selectively. Crowdfunding is a promising method of raising capital that allows an entrepreneur to shop his or her idea to a great audience of potential investors without running afoul of the Securities Act’s constraints.
On April 5, 2011, U.S. President Barack Obama signed into law the Jumpstart Our Business Startups Act (“JOBS Act”). The White House stated that the legislation “will allow Main Street small businesses and high-growth enterprises to raise capital from investors more efficiently, allowing small and young firms across the country to grow and hire faster.” The JOBS Act contains a provision entitled “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” (“CROWDFUND Act’’), which is designed to facilitate nontraditional financing. Essentially, the CROWDFUND Act lessens the regulatory burden on small businesses, particularly the extensive obligations imposed pursuant to the Securities Act as amended by the Sarbanes-Oxley Act, to potentially enable these businesses to raise funds quicker and from a wider variety and greater number of sources. Beyond businesses that pursue the traditional entrepreneurial goal of financial profit, the CROWDFUND Act could also significantly benefit social entrepreneurs. At the same time, in an environment of less regulatory requirements and on-line promotions, potential investors considering crowdfunding offerings must be especially wary of the potential for fraud.
In this article, the authors explore crowdfunding — its history and its potential future — particularly in light of the CROWDFUND Act, with its stated purpose of facilitating capital formation in the United States. Part A of this article briefly describes the definition, rationale, and practice of “crowdfunding,” noting its distinction from investment clubs and its various types. Part B provides an overview of the CROWDFUND Act, particularly its key provisions, relationship with state laws, and the status of related rulemaking by the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (‘‘FINRA’’). Part C considers the impact of the CROWDFUND Act on entrepreneurs’ crowdfunding activities, both before and during the offer or sale of securities. Part D reflects on criticisms of crowdfunding generally and the CROWDFUND Act specifically. Finally, Part E discusses how entrepreneurs and their legal representatives may want to help shape the crowdfunding process moving forward.
Number of Pages in PDF File: 15
Keywords: Small business, entrepreneurship, social entrepreneurship, crowdfunding, financing, fundraising, capital, Jumpstart Our Business Startups Act, JOBS Act, CROWDFUND Act, Securities Act of 1933, Sarbanes-Oxley Act, Kickstarter, Securities and Exchange Commission, Financial Industry Regulatory Authority
Date posted: February 5, 2013