Financial Contracting with the Crowd

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2019-09-13

Posted by Usha Rodrigues (University of Georgia), on Friday, September 13, 2019
Editor's Note: Usha Rodrigues is the M.E. Kilpatrick Chair of Corporate Finance and Securities Law at the University of Georgia School of Law. This post is based on her recent article, forthcoming in Emory Law Journal.

Today’s equity crowdfunding is a sucker’s game. It’s no wonder. The prospect of allowing the general public—widows, orphans, grandmothers, and all—the chance to invest in private companies for the first time in eighty years understandably spooked the powers that be. First Congress and then the SEC in turn layered requirement after requirement on crowdfunding companies seeking to raise money from the public capital markets. The result, unfortunately, is a burdensome compilation of regulations that is widely regarded as not being worth the effort, especially when companies can raise at most only $1.07 million for their troubles.

Regulation CF almost certainly does not reflect the investor protections that market forces on their own would require from companies seeking funding. But, of course, that’s sort of the point—at least since 1933, the government has always dictated what investor protections (largely disclosure based) firms seeking public money should provide. What would the market for investor protections look like without the interpolation of government regulation? In the past, the answer to that question could come only from speculation. Yet if we could look to actual market demands, we might discover more effective investor protections than what legislators and bureaucrats dream up. Coupling such market-tested protections with raising the cramped amounts ceiling might well rescue equity crowdfunding from its current irrelevancy.