Equity Crowdfunding Portals Should Join and Enhance the Crowd by Providing Venture Formation Resources
34 Pages Posted: 20 Sep 2019
Date Written: September 18, 2018
Several leading venture capital (VC) law firms share their formation-related resources online. These resources are for high-growth ventures forming as Delaware corporations and using equity to recruit, motivate, compensate, and retain employees. While different law firms provide these materials, the resources are quite similar. Many of the resources used by VC-backed companies are well suited for Regulation Crowdfunding (Regulation CF) issuers. This is because the typical Regulation CF issuer is also a new, high-growth, Delaware corporation with four or five employees. Thus, like VC-backed companies, Regulation CF companies should benefit from providing equity to employees, making that equity subject to vesting, and taking advantage of a two-tier stock structure (i.e., by issuing relatively inexpensive common stock to employees and more expensive preferred stock to outside investors). The established VC ecosystem has demonstrated that sharing formation-related resources reflecting these best practices helps its stakeholders. It is time for equity crowdfunding portals to provide similar formation-related resources to Regulation CF issuers and to even require usage. Alternatively, an equity crowdfunding association could develop and maintain such resources. Funding portals could then select which resources to require their issuers to use. Regardless, by having issuers to use a set of formation-related resources, funding portals could ensure best practices are followed, reduce transaction costs, and accelerate growth and the creation of wealth without practicing law. Given many Regulation CF companies lack the cash and expertise, they should value these formation-related resources even more than the VC-backed companies do.
Keywords: Equity Crowdfunding, Business Formations, Venture Capital, Legal Technology
JEL Classification: K22, M13, G24
Suggested Citation: Suggested Citation