Crowdfunding's Culture of Noncompliance: An Empirical Analysis

Abstract

The JOBS Act of 2012 launched a number of experiments in the regulation of securities offerings. The exemption it created that allows online equity crowdfunding offerings to retail investors garnered the most attention, in part due to widespread concerns regarding the potential for fraud and abuse. More than three years after the first crowdfunding offering, no empirical analysis of compliance has been conducted that would debunk or confirm critics’ concerns. This Article plugs that gap by analyzing a sample of 362 crowdfunding offerings and evaluating compliance with some of crowdfunding regulation’s simplest, most fundamental regulatory requirements. During the first 13 months of crowdfunding, almost half of issuers failed to file complete financial statements that met the applicable standard of review, barely one-quarter of issuers that were required to file two annual reports did so, less than 15 percent of issuers timely filed the final amount raised in their offering, and the only data point on Form C that was reviewed was, far more often than not, substantially inaccurate. Finally, the third largest crowdfunding funding portal may be violating the prohibition against a funding portal’s giving advice. In short, these findings reveal a deeply embedded culture of noncompliance. This Article is timely in light of the issuance of a concept release by the Securities and Exchange Commission that is intended to set the table for further liberalization of exempt offerings. Rather than supporting such changes, the findings set forth in this Article create doubt as to whether the crowdfunding experiment will even survive. This Article proposes a series of reforms that would address some of the above-mentioned noncompliance problems while both benefiting investors and reducing costs and burdens for issuers.

Keywords: crowdfunding, private offering, securities, capital formation, compliance, issuers

JEL Classification: G380, K220