The Promise and Perils of Crowdfunding: Between Corporate Finance and Consumer Contracts

Abstract

‘Crowdfunding’ — raising capital through large numbers of small contributions — is a burgeoning phenomenon, spurred by the internet’s capacity to reduce communication costs. Its still-evolving status is reflected in diversity of contracting practices: for example, ‘equity’ crowdfunders invest in shares, whereas ‘reward’ crowdfunders get advance units of product. These practices occupy a hinterland between existing regimes of securities regulation and consumer contract law, with no consistency of treatment. Thus consumer protection law in the UK (but not the US) imposes mandatory terms that impede risk-sharing in reward crowdfunding, whereas US (but not UK) securities law mandates expensive disclosures that hinder equity crowdfunding. This article offers a normative roadmap for the regulation of crowdfunding. We suggest that while crowdfunding poses real risks for funders, neither the classical regulatory techniques of securities or consumer law provide an effective response. At the same time, a review of rapidly-developing mechanisms in crowdfunding markets suggests they offer the potential to provide meaningful protection for funders. In light of this, a permissive regulatory approach — with a credible threat of intervention should the market fail to protect consumers — is justified.

Keywords: crowdfunding, start-up finance, securities law, distance selling

JEL Classification: K12, K22, G34