Pricing Disclosure: Crowdfunding’s Curious Conundrum
7 Ohio State Entrep. Bus. L. J. 374-427 (2012)
55 Pages Posted: 31 Mar 2013
Date Written: 2012
Crowdfunding occupies a hybrid regulatory space. Directed to “public investors,” it receives an exemption from Securities Act registration similar to that available to “private issuers.” Critical to the success of this regulatory experiment, which has great potential and much risk, is the disclosure of how securities (whether equity or debt) are priced in a crowdfunding offering. Pricing disclosure in “public offerings” is prospectus boilerplate, giving little clue about the behind-the-scenes negotiations between the offering’s managing underwriter and the issuer. Pricing disclosure in “private offerings” is similarly opaque, assuming that sophisticated investors are keenly aware of the pricing models and multiples that underlie their negotiations with the issuer. In an online crowdfunding, neither small investors nor small issuers will know the valuation techniques the cognoscenti use to determine price. For crowdfunding to be successful – for both issuers and investors – structures must exist for pricing analysis, disclosure and protection. The new crowdfunding law takes some steps in this direction. It requires intermediation by a securities firm or Internet portal. It requires crowdfunding investors receive “investor education.” And it creates negligence liability for misinformation, imposed both on the issuer and the intermediary. But as useful as these provisions may be, the critical (and yet to be implemented) wildcard will be pricing disclosure standards. To ensure both investor protection and efficient capital formation, securities valuation/pricing should be seen as “material.” And any failure by issuers (and their intermediaries) to explain to investors how the offering price was determined should be treated as fraudulent. But there is a conundrum. As a practical matter, crowdfunding is capped at $500,000 per offering. Effective enforcement is problematic: public SEC enforcement would likely happen only in egregious cases; private litigation would be a stretch; and arbitration may be a panacea. Most realistic is some financial “guarantee” offered by crowdfunding intermediaries, similar to how other online merchants gain customer trust. Time will tell.
Keywords: crowdfunding, securities, disclosure, small business, intermediaries, arbitration
JEL Classification: D29, G32, K22, M13, O16, P43
Suggested Citation: Suggested Citation