Recent legal reforms have authorized the “crowdfunding” of securities, which is where a company offers stock, bonds or other securities over the Internet, without having to comply with the usual (and costly) registration and disclosure requirements imposed by the SEC and state securities regulators. In a recent symposium article, I highlight and discuss the importance of inclusivity to this new type of securities market, and demonstrate that one type of securities crowdfunding is more inclusive than the others.
The federal Jumpstart Our Business Startups (JOBS) Act of 2012, as well as similar legislative reforms in 33 states and counting, created three different forms of securities crowdfunding: (1) retail crowdfunding, under Title III of the JOBS Act; (2) accredited crowdfunding, under Title II of the JOBS Act, which is legally restricted to accredited (ie, wealthy or sophisticated) investors; and (3) intrastate crowdfunding, which is limited to investors and companies in a single state.
Which of these three types—all in their infancy—holds the most promise? Numerous thoughtful commentators have suggested that accredited investing will dominate over the alternatives. In their view, the lighter regulatory burden and the freedom to raise unlimited funds across the country makes accredited crowdfunding so attractive that the alternatives are likely to wither away. State legislators, for their part, seem to think intrastate crowdfunding has its place, given that practically all such laws were enacted subsequent to the passage of the federal JOBS Act.
Without claiming to finally resolve this debate, my article adds the following point:because inclusivity is foundational to securities crowdfunding, and because retail crowdfunding is more inclusive than accredited or intrastate crowdfunding, that form holds an inherent advantage over the alternatives.
Inclusivity, defined as an “intention or policy of including people who might otherwise be excluded or marginalized,” is an important tenet of our society. This is not only for its inherent value, which is surely weighty, but also for the instrumental reason that inclusive economic institutions—those that “encourage participation by the great mass of people” and “enable individuals to make the choices they wish”—encourage economic growth and prosperity. This describes securities crowdfunding to a T: as for investors, crowdfunding specifically authorizes “the great mass of people”—the crowd—to make investments that had previously been offered to an exclusive group of connected and wealthy investors. And, as for entrepreneurs, securities crowdfunding is designed to provide an opportunity for everyone, regardless of age, ethnicity, geographical location, or anything else.
Inclusivity is thus a vital aspect of securities crowdfunding. Rather than needing a rich uncle, or a move to Silicon Valley, securities crowdfunding is meant to be an inclusive market where all investors and entrepreneurs are welcome. Furthermore, if we compare the three types described above, we see that retail crowdfunding is certainly more inclusive than the other two: accredited crowdfunding is legally limited to “accredited” (wealthy) investors; the middle class and poor are expressly barred. And intrastate crowdfunding only allows in-state companies to solicit in-state investors; entrepreneurs or investors from the other forty-nine states may not lawfully participate.
Retail crowdfunding, by contrast, is open to all Americans, rich and poor, young and old, urban and rural. This inclusive nature of retail crowdfunding provides a distinctive advantage to this nascent form of capital finance.
Andrew A. Schwartz is an Associate Professor of Law at the University of Colorado Law School.