Selling Crowdfunded Equity: A New Frontier

Abstract

This article briefly offers information and observations about federal securities law transfer restrictions imposed on holders of equity securities purchased in offerings that are exempt from federal registration under the CROWDFUND Act, Title III of the JOBS Act. The article first generally describes crowdfunding and the federal securities regulation regime governing offerings conducted through equity crowdfunding — most typically, the offer and sale of shares of common or preferred stock in a corporation over the Internet — in a transaction exempt from federal registration under the CROWDFUND Act and the related rules adopted by the U.S. Securities and Exchange Commission. This regime includes restrictions on transferring securities acquired through equity crowdfunding. The article then offers selected comments on both (1) ways in which the transfer restrictions imposed on stock acquired in equity crowdfunding transactions may affect or relate to shareholder financial and governance rights and (2) the regulatory and transactional environments in which those shareholder rights exist and may be important.

Ultimately, the long-term potential for suitable resale markets for crowdfunded equity — whether under the CROWDFUND Act or otherwise — is likely to be important to the generation of capital for small business firms (and especially start-ups and early-stage ventures). In that context, three important areas of reference will be shareholder exit rights, public offering regulation, and responsiveness to the uncertainty, information asymmetry, and agency costs inherent in this important capital-raising context. Only after a period of experience with resales under the CROWDFUND Act will we be able to judge whether the resale restrictions under that legislation are appropriate and optimally crafted.

Keywords: crowdfunding, equity crowdfunding, CROWDFUND Act, JOBS Act, resale, resale restriction, transfer restriction, secondary market

JEL Classification: G11, G18, G38, K22, M13, O33