Crowdfunding Delusions

Beyond all the hype surrounding crowdfunding there is a curious incongruity. On the one hand, there exist apparently successful crowdfunding sites; on the other hand, more than three years after the Jumpstart Our Business Act (“JOBS Act”) mandated an equity crowdfunding exception, we are still waiting for final regulations from the Securities and Exchange Commission. This essay explores this irony, arguing that existing crowdfunding sites carefully manage around a fundamental ambiguity in the securities laws—a surprisingly fuzzy definition of what a “security” is. It then shifts to understanding the existing regulatory framework: the federal crowdfunding statute and proposed rules, as well as other existing alternatives issuers might consider. Second, this essay surveys other potential alternatives to place crowdsourced securities and even new state crowdfunding exemptions—but ultimately argues that none are attractive. As such, it is far more likely that crowdfunding sites will continue to operate as they currently do, rather than subject themselves to any new crowdfunding rules or seek alternative exemptions. Finally, it argues that, for all of its advantages, crowdfunding presents fundamental negatives that cannot be regulated away. As such, we must face a stark choice: either prophylactically ban the activity, or allow it with few restrictions. To think that we can craft a balanced regulatory framework for crowdfunding is delusional