Open PDF in Browser: David Nows,* Accessible Financial Data For Equity Crowdfunding Investors
The use of equity crowdfunding as a way for startups to raise capital has more than quintupled since 2018, when measured by the dollar amount raised each year by the startups using this exemption from federal securities registration. With this growth, more inexperienced investors are participating in these securities offerings each year, and these investors have limited access to easily understood financial data regarding the companies in which they are choosing to invest. This lack of useful financial data is a direct cause of poor investment choices by a set of investors not well positioned to withstand significant investment losses.
This Article argues for a small but significant revision to the set of regulations governing equity crowdfunding that would require the websites who host equity crowdfunding offerings, the portals, to provide investors with at least two major data visualization tools to assist them with reviewing and understanding issuer financial data. While other scholars have focused on the mix of disclosures required of issuers, this Article focuses on how the law can require portals and issuers to display the information that is already being disclosed in a way that is more accessible to ordinary people investing in startups through equity crowdfunding. In making this recommendation, this Article leverages key findings from research in behavioral finance that supports the policy recommendation provided. This proposal is important because it will reduce information asymmetries between investors and issuers in equity crowdfunding offerings, which will better advance the original congressional goals of the exemption: capital formation for startups and the democratization of the startup investor base.
Introduction
Equity crowdfunding, a relatively new concept in capital raising for entrepreneurial ventures, is the process through which companies solicit and raise capital from financial investors over the internet through a specialized website created specifically to host the fundraising campaigns of new ventures. In exchange for providing capital, investors receive securities in the issuer company, which may be actual shares of company stock or other financial rights in the company’s assets. Issuers are permitted to set the terms of the deal unilaterally, meaning that the issuer dictates the terms of the investment contract between issuer and investor. Further, the issuer places a valuation on the company that is used to calculate the percentage of equity a particular investor receives in the startup, if preferred stock is the security being purchased by the investor.
Companies raising capital through Regulation Crowdfunding (“Regulation CF”), the equity crowdfunding exemption, are permitted to raise up to $5 million in a twelve‑month period from both accredited and non‑accredited investors via a Securities and Exchange Commission (SEC) approved equity crowdfunding portal.[1] The ability for these startups to raise capital from mass amounts of non‑accredited investors, investors who are not wealthy, high‑income, or possessing specialized knowledge about startup investing, makes Regulation CF unique among exemptions from securities registration.[2] This ability to raise capital from non‑accredited investors is also consistent with the aims of the Jumpstart Our Business Startups (JOBS) Act, the law passed by Congress and signed by President Barack Obama in 2012 that directed the SEC to write a final rule permitting the equity crowdfunding exemption.[3] The JOBS Act was borne out of a bipartisan desire to facilitate greater amounts of capital formation for startups in a post‑recession economy. The legislation also had the goal of democratizing startup investing by allowing for non‑accredited investors to participate en masse through the created exemption. Given that non‑accredited investors are essentially limited to offerings from startups using this exemption from the securities law, Regulation CF provides an opportunity to provide an added layer of investor protections to these potentially vulnerable, novice startup investors. However, providing strengthened protections to non‑accredited investors was not a top priority in the rulemaking.
Unfortunately, one area in which non‑accredited investors are likely to struggle in relation to Regulation CF is the evaluation of investment opportunities. Regulation CF requires only limited financial and legal disclosures from issuers.[4] In fact, it is possible to raise a small amount of capital through Regulation CF without providing audited financial statements to prospective investors.[5] Further, issuers may begin fundraising through Regulation CF without providing financial data on their company until twenty‑one days before the fundraising efforts end.[6] Investors who have committed early in the process may rescind their investment commitment upon viewing the issuer financial data, it is not likely that they will do so. Thus, non‑accredited investors must make investment decisions based on limited or no data, often presented in a professional format (e.g., audited financial statements) when it is available.
Of course, evaluating this data in a meaningful way can be challenging for rookie startup investors without any formal experience or training on the subject. To make matters worse, almost every other part of the equity crowdfunding portal allows for issuers to pitch the investment opportunity through engaging means like video, images, graphics, and social media features.[7] This type of marketing can encourage non‑accredited investors to make financial decisions based on marketing materials and not financial data.
This Article explores the role of the SEC and equity crowdfunding portals in requiring new ways in which equity crowdfunding investors may interact with the financial and legal data behind issuers raising capital through Regulation CF. The Author’s hypothesis is that non‑accredited equity crowdfunding investors are either unaware of the availability of financial data about the issuers in which they invest, or alternatively, face significant challenges in evaluating and understanding financial data presented in a traditional format.[8] Given this hypothesis, this Article will explore the wisdom and viability of alternative methods of displaying financial data about investment opportunities. The alternatives range from the ability to sort, filter, and choose investment opportunities based on investor‑chosen criteria,[9] to rating systems based on a publicly disclosed rubric, like those used in the stock, bond, and mutual fund spaces.[10]
The goals of the research are significant, as this Article seeks to set a path forward for equity crowdfunding in the United States that provides non‑accredited investors the ability to find viable investment opportunities easily.[11] This Article also seeks to suggest policy avenues and private ordering strategies that will ensure that more investment dollars flow to high‑potential startups through Regulation CF, which will make the exemption more effective in terms of wealth and job creation—two of the original goals of the JOBS Act.[12] In crafting a path forward that does not add onerous disclosure requirements, but rather easily met data visualization requirements, we can make it far more likely that all investors will understand the information most critical to their investment decisions, rather than miss it in a sea of marketing materials.[13] Building on previous research theorizing that most equity crowdfunding issuers make for bad investments, this research seeks to blaze a path that will allow markets to more easily remove these “lemons” from the set of investment opportunities available through Regulation CF.[14]
This Article proceeds in five parts. First, in Part I, this Article reviews the legal rules behind equity crowdfunding, the novelty of the non‑accredited investor, and the associated challenges of combining the issuers who participate in equity crowdfunding offerings with non‑accredited investors. In Part II, this Article reviews the financial data typically provided by equity crowdfunding issuers to potential investors, compares the format of those financial disclosures with best practices in financial data visualization, and shares how current standard‑bearers present financial data to users. Part III of this Article provides strategies that equity crowdfunding portals could implement to better display issuer financial data in a visual way. Part IV weighs the benefits and drawbacks of enforcing the financial data visualization ideas shared in Part III as a legal requirement, versus integrating it into the equity crowdfunding ecosystem as a best practice adopted by key players like the SEC‑approved portals that host this activity. Lastly, Part V of the Article provides the Author’s proposal on how to integrate some of the data visualization elements discussed in Part III with the current framework of equity crowdfunding laws and best practices. Part V also discusses this proposal’s importance to the future viability and credibility of the equity crowdfunding exemption.
I. Equity Crowdfunding, the Typical Non‑Accredited Investor, and the “Lemons” Problem
This Part has three main objectives. First, it will review the legal rules behind equity crowdfunding, enforced through Regulation CF, as well as the best practices that have emerged between the issuers, investors, and SEC‑approved equity crowdfunding portals that participate in these investment transactions. Secondly, this Part will contemplate the non‑accredited investor’s ability to freely invest in startup ventures—a novelty in the investment landscape—which began when Regulation CF was passed in 2016. Lastly, this Part will review previous literature on equity crowdfunding. In this review, the Author will highlight the associated challenges of combining the issuers who participate in equity crowdfunding offerings with the novice non‑accredited investors who are now a significant participant in the startup investing ecosystem.
A. Equity Crowdfunding Basics
The basic concept of securities law, from an issuer’s perspective, is that you must either register with the SEC or meet one of the agency’s exemptions from registration in order to raise capital from investors. Registration is a burdensome process, both in terms of the amount of information an issuer must disclose and the cost of becoming compliant and maintaining compliance with the registration process.[15] While the spoils of being registered with the SEC are significant, as registration provides access to the public markets and virtually any investor through an initial public offering (IPO), the costs of compliance are prohibitively expensive for all but the most financially mature issuers. This is evident by the amount of time it has taken highly successful startups to reach an IPO. For example, Uber’s IPO took place in May 2019, a full ten years after the company was launched.[16] Another instructive example is Airbnb, which had its IPO in December 2020 despite being founded thirteen years earlier in 2007.[17]
For companies who are not mature enough to register with the SEC, meeting an exemption from securities registration is the best option for raising capital from investors while remaining in compliance with the federal securities laws. Traditionally, exemptions from registration have limited issuers to raising capital from a group of investors who meet the definition of an “accredited investor.” Accredited investors are individuals who meet either financial or professional criteria, or entities like banks and venture capital funds that meet SEC‑specified criteria.[18] With respect to individual investors, an investor must have a net worth over $1 million, excluding the value of her primary residence, or have an annual income of over $200,000 (individually) or $300,000 (if married) in order to meet the SEC’s financial criteria for accredited investors.[19] Recently, the SEC added the option for individuals to become accredited through knowledge‑based means, like holding a Series 7, 65, or 82 license for investment professionals.[20] A 2015 review of the SEC’s definition of “accredited investor” concluded that certifications that qualify an investor to be accredited should be directly relevant to securities and investing, and the SEC appears to have taken that approach in adding these specific certifications as ones that allow an individual to become an accredited investor.[21] While this path has made the accredited investor club a bit more inclusive, it still remains an exclusive club that consists of mostly high‑income or high‑wealth individuals.
The issue of investor inclusion is one of the two main gaps equity crowdfunding seeks to fill in the United States securities law regime. The concept of equity crowdfunding is simple: It is a process through which a company raises relatively small amounts of capital via the internet[22] from a relatively large number of investors in exchange for an equity (or other financial) interest in the company.[23] Historically, this type of activity was barred by the SEC because the fundraising activity solicits both accredited and non‑accredited investors, and it takes place on the internet.[24] However, Congress enacted the JOBS Act in 2012, which contained the Capital Raising Online While Deterring Fraud and Unethical Non‑Disclosures (CROWDFUND) Act.[25]
Through these actions, Congress opened the door for issuers to raise capital online from both accredited and non‑accredited investors.[26] Congress hoped that the JOBS Act and its CROWDFUND Act would achieve a few main goals. First, Congress wanted to democratize startup investing by providing access to the private markets to non‑accredited investors.[27] Investing in a diversified portfolio of higher‑risk investments, like startups, has been demonstrated to be a wealth‑building activity that can outperform investing in the public markets, and one that has historically only been available to the already‑wealthy or high‑income individuals.[28] Second, Congress hoped to encourage a new pool of capital to be invested in new business ventures, given that new businesses are the key driver of new job creation in the United States economy.[29] Coming out of a brutal recession, Congress wanted to encourage private activity that would lead to new, high‑quality job opportunities for an increasingly educated workforce.[30]
Once the JOBS Act was signed into law, the SEC was tasked with implementing the traditional rulemaking process to bring equity crowdfunding to life through an exemption to the securities law.[31] After a rather lengthy notice and comment process, equity crowdfunding went live in the United States in the fall of 2016, with the SEC’s final rulemaking on Regulation CF.[32] Regulation CF allows issuers to raise a limited amount of capital ($5 million) from both accredited and non‑accredited investors over a twelve‑month period via an SEC‑approved crowdfunding portal in exchange for compliance with certain mandated disclosures via Form C.[33] Given Regulation CF’s modest capital limit of $5 million per twelve‑month period, it is traditionally seen as a “bridge‑funding” exemption, allowing issuers to raise a round of capital that serves as a bridge between the days of the company’s founders funding operations and the anticipated future of raising larger amounts of capital from professional investors.[34] High‑growth startups seeking bridge‑funding capital via equity crowdfunding are often no more than an idea, a prototype, and a vision for the future.[35] Importantly, equity crowdfunding has also attracted nontraditional issuers like lifestyle ventures and community‑facing organizations who may use funding for sustained operations, infrastructure improvements, or expansion of the company’s menu of offerings.[36] Scholars have hypothesized that investors who contribute to these equity crowdfunding campaigns may make additional, non‑financial considerations when investing in companies meeting these criteria.[37]
The disclosures required through Form C (derived from Rule 201 of Regulation CF) are more limited than those required of issuers raising capital through other exemptions to securities registration, given the smaller amount of capital being raised by equity crowdfunding issuers when compared to issuers raising capital through Regulation A, Regulation D, Rule 4(a)(2), or other common exemptions used by startups.[38] Form C requires issuers to provide financial statements, information on the company like a business plan and the intended use of proceeds, information regarding the current finances of the company, information on the company’s leadership (officers, directors, and twenty‑percent‑or‑more owners), and the specifics of the offering itself.[39] Additionally, update forms are required when a material change is made to the offering, when specific progress intervals are reached in the offering, annually after the offering commences, and when reporting is legally permitted to end for the issuer.[40]
Rule 201(t) of Regulation CF requires issuers to provide financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP).[41] For small offerings of $124,000 or less in one year, these financial statements only need to be certified by the issuer’s principal executive officer.[42] For offerings that raise more than $124,000 but not more than $1,235,000, financial statements must be prepared in accordance with GAAP and reviewed by a public accountant who is not affiliated with the issuer are required.[43] Lastly, for the largest Regulation CF offerings, those more than $1,235,000 but not more than $5,000,000, financial statements that have been prepared in accordance with GAAP and audited by an independent public accountant are required.[44]
Further, Rule 303 of Regulation CF forces crowdfunding portals[45] (defined by the SEC as “intermediaries”) to make all information about the issuer required by Rule 201 (including financial information) and Rule 203(a) available to investors no later than twenty‑one days before the first day securities are sold.[46] Rule 303 creates an interesting dynamic on portals as some issuers will immediately share the financial information required by Rule 201(t) once an offering has launched.[47] Others, however, take full advantage of the language of Rule 303 by waiting to release the issuer’s financial statements until later in the offering process.[48] This allows an issuer to receive a substantial amount of non‑binding commitments from investors before providing those investors with any financial information relevant to the offering itself.[49] During this period, investors only interact with the marketing materials provided through the portal by the issuer and base their investment decision solely on that information.[50] While investors may later revoke their investment upon the issuer’s financial statements being shared via the portal, it is possible that the investor will only have nineteen days to do so, as investments become “locked‑in” forty‑eight hours prior to an offering ending.[51]
As an example, the issuer Clockwork raised capital via the portal Wefunder in 2023 and provided verification that its public accountant reviewed the company’s financial statements for compliance with GAAP.[52] Additionally, the company took advantage of some of Wefunder’s graphic display tools to display highlighted financial data like revenue, net loss, short‑term debt held, cash on hand, and capital raised in the prior calendar year.[53] Through these disclosures, prospective investors could see all legally required financial information about the issuer through traditional financial statements, while also referencing select statistics about the company that were pulled from the data and featured prominently on the issuer’s portal page.[54] Clockwork had success raising capital while providing these disclosures in a timely fashion, raising $7,362,330.[55]
A counter‑example to Clockwork’s above approach is observed with the issuer Humanity, a company that created an app to monitor the user’s aging process while also providing the user with tips and tricks to slow the aging process down.[56] Humanity elected to begin raising capital before providing the financial statements required by Rule 201(t), which is permitted by Rule 303 as long as the financial statements are posted to the portal twenty‑one days prior to the equity being sold to investors.[57] As of November 22, 2023, Humanity had not provided financial statements to investors but had raised $325,571 through Regulation CF from 213 unique investors.[58] Ultimately, the company later added its financial data to the portal prior to the offering’s end.[59]
Importantly, in each of the examples above, these securities offerings are primary offerings, meaning that they are sales of new securities from the issuer directly to an investor.[60] Regulation CF allows for primary offerings of securities from issuers to investors through an SEC‑approved equity crowdfunding portal. Secondary offerings, or sales of securities from an investor holding the securities to other investors, must meet their own exemption from the securities law to occur.[61] This restriction applies to the resale of securities purchased by investors through equity crowdfunding offerings.[62] Thus, securities purchased by equity crowdfunding investors through the portal are largely illiquid.
B. Non‑Accredited Investors and Startup Investing
Despite the limited financial information available on some issuers until relatively late in the decision‑making process, capital provided by the crowd to these issuers remains a financial investment. This type of equity crowdfunding investing through Regulation CF introduces an interesting challenge for regulators, who must balance the stated desire of Congress to make capital more freely available to issuers, all while finding a way to adequately protect the many non‑accredited investors who are likely to make investments in new ventures for the first time through a Regulation CF offering.[63] As mentioned earlier in this Article, Regulation CF is the main exemption through which non‑accredited investors may participate in the securities offerings of non‑public companies.[64] This means that Regulation CF offerings have a unique potential to harm investors who are not wealthy and do not have high incomes. Given the great efforts undertaken by the SEC to protect investors generally, including the relatively affluent accredited investors who participate in most exempt offerings, it makes sense to ask if the SEC is doing enough to protect investors with lower incomes and less wealth participating in Regulation CF offerings.[65]
Currently, an unlimited number of non‑accredited investors may participate in any Regulation CF offering. These non‑accredited investors are limited with respect to the amount of capital they are permitted to invest in Regulation CF offerings during any twelve‑month period based on their annual income and net worth.[66] The first relevant question in these cases is whether an individual non‑accredited investor has both an annual income and a net worth above $124,000.[67] If a non‑accredited investor meets both of those criteria, he or she may invest 10 percent of the greater of the investor’s annual income or net worth, with a cap of $124,000.[68] Investors who have an annual income or net worth below the $124,000 mark are limited to investing the greater number when comparing the following options: (1) $2,500 annually or (2) 5 percent of the greater of the investor’s annual income or net worth.[69] Enforcement of these requirements relies on portals to track individual investors and individual investors to adequately self‑report transactions they have taken part in on other portals.[70] Issuers are permitted to rely on the portals and their accounting of individual investor limits, unless they have actual knowledge of an investor exceeding these limits.[71]
It is noteworthy to mention that these twelve‑month investment limits do not apply to accredited investors, who are free to invest any amount in Regulation CF offerings.[72] However, other important requirements of issuers apply to their interactions with both accredited and non‑accredited investors. For example, most solicitation and communication activity must take place over the internet,[73] and issuers face relatively strict requirements for sharing information about an offering with prospective investors under Rule 204.[74] Issuers are essentially limited to sharing factual information about the issuer and the offering, which intermediary platform is hosting the offering, and a link to the offering page on the intermediary’s website.[75] However, once an investor is directed to the offering’s homepage on an SEC‑registered portal, the issuer has no significant securities law-related restrictions on its communications with prospective investors.[76] Issuers may choose to take full advantage of the ability to overwhelm investors with attractive marketing materials through the portal, and some do, to successfully solicit an investment.
This mix of rules that apply to equity crowdfunding issuers and non‑accredited investors are important to consider in the context of non‑accredited investors being a particularly vulnerable population that the SEC is charged to protect. The equity crowdfunding industry continues to grow rapidly, as evidenced by the 541.8 percent growth in the amount of capital raised via Regulation CF between 2018 and 2021.[77] While growth was flat in 2022 and down slightly in 2023, raising capital through Regulation CF remains a nearly $500 million dollar industry in the United States that has grown nearly six‑fold since 2018.[78]
This growth and maturity are occurring despite the fact that it is too soon to tell if early equity crowdfunding issuers have provided good investment opportunities for the non‑accredited investors who are confined to making investments in startups through this exemption. Given that Regulation CF has only been available to issuers since 2016 and investments in startups typically occur with the expectation of a return on a ten‑year time horizon, there is limited data on how well investors have fared using the exemption to date.[79] While industry publications have used data on angel investor returns to encourage investors to place capital in Regulation CF offerings (instead of the public markets), this comparison is disingenuous because angel investors typically command a seat at the negotiating table before entering into a deal with an issuer.[80] Regulation CF investors face significant headwinds when compared with angel investors, like the inability to negotiate deal terms and very limited amounts of available financial and diligence information.[81] These headwinds for equity crowdfunding investors are a clear market failure. While venture capitalists and angel investors may negotiate key deal terms, including the company’s valuation with an issuer, equity crowdfunding investors are presented with “take‑it‑or‑leave‑it” deal terms by issuers.[82] Thus, there is no ability for key information disclosed by issuers to be factored into the price of the investment by individual investors, a key mechanism of a well‑functioning market.
Additionally, equity crowdfunding investments are illiquid, in a similar way to investments made by angel investors.[83] Studies of equity crowdfunding returns in other countries with more established track records have demonstrated that equity crowdfunding investors should expect far more modest returns.[84] Aside from structural differences in how investors can negotiate investment deals through Regulation CF, there may be other reasons for the expectation of lower investment returns, which have been discussed in recent law review literature, the topic of Section I.C.
C. Previous Literature on Equity Crowdfunding, Including the “Lemons” Problem
Paired with the entrance of non‑accredited investors into the startup investment space, a commonly cited theory in the legal literature demonstrates why there is potential cause for concern with respect to equity crowdfunding through Regulation CF. Darian Ibrahim’s 2015 article titled Equity Crowdfunding: A Market for Lemons? explores the issue of investment quality within the equity crowdfunding markets.[85] In this article, Ibrahim theorizes that most high‑quality startups will seek capital from traditional investors through other exemptions from securities registration because these investors can offer advice and connections to the startup’s leadership team.[86] Given that most high‑quality startups will want the “value add” of the connections and advice provided by professional investors, only lower‑quality startups, or “lemons,” will ultimately seek capital from non‑accredited investors (with no connections or experience) through Regulation CF.[87]
An interesting and rich body of literature has grown out of Ibrahim’s article. As an example, an article by Allen C. Page in 2022 discusses the lemons problem for non‑accredited investors across all securities law exemptions and recommends reforms to Rule 506(b) and Rule 506(c) to better accommodate non‑accredited investors into more common offering types.[88] In the Regulation CF context, this Author has previously written about possible exceptions to the lemons rule put forth by Ibrahim, focusing on small business ventures that raise capital from “fan investors” who may be motivated by more than simply financial returns.[89] Additionally, a 2018 article by C. Steven Bradford recognizes the likelihood of fraud in Regulation CF offerings and suggests online arbitration as a solution for aggrieved investors.[90] Lastly, Ibrahim built on his own work in his 2017 article, Crowdfunding Without the Crowd, by suggesting curated expert opinions as a key function of crowdfunding portals, which could provide novice investors with useful guidance as they select new ventures to invest in.[91]
This Article seeks to build on Ibrahim’s idea in Crowdfunding Without the Crowd: The content and presentation of relevant information about issuers on equity crowdfunding portals is an important feature of Regulation CF. Additionally, this Article seeks to heed Ibrahim’s warning in Equity Crowdfunding: A Market For Lemons? that non‑accredited investors should avoid investing in low‑quality startups through Regulation CF. This challenge in the equity crowdfunding markets is worth considering in any efforts to craft future iterations of equity crowdfunding policy. Investor protection is a noble policy goal, especially when considering the needs of non‑accredited investors with limited capital who invest in the public and private markets. However, Congress (through the JOBS Act) sought to encourage additional capital formation for startups and small businesses, which is, in many ways, an equally worthy policy goal. The remainder of this Article aims to balance concerns of non‑accredited investors providing capital to poor quality startups with the goal of encouraging capital formation for startups and small businesses generally. In doing so, this Article focuses on how legal policy or industry best practices can provide prospective investors with the tools they need to properly evaluate investment opportunities through equity crowdfunding portals, while avoiding introducing further burdensome disclosure requirements for equity crowdfunding issuers.
II. Financial Data via Equity Crowdfunding Portals, Best Practices in Financial Data Visualization, and Current Standard‑Bearers in Investment Data Visualization
Part II seeks to connect the dots between the current presentation of financial data by issuers via equity crowdfunding portals with research‑backed best practices for presenting financial data to investors and decision‑makers. First, this Part will contemplate the issue of information asymmetry between issuers and investors in equity crowdfunding. Next, this Part will review the financial data presented by equity crowdfunding issuers to potential investors through portals. This data is largely presented through financial statements, which are sometimes required by Regulation CF to be GAAP‑compliant and professionally audited, depending on the amount of capital raised by the issuer. Then, this Part will compare the format of equity crowdfunding issuer financial disclosures with other, more effective ways of presenting financial data to novice investors. In making this comparison, the Author will draw from other investment contexts, like the data presentation for publicly traded stocks and mutual funds purchased through traditional brokerage and retirement accounts. Additionally, this Part will share examples of how these best practices from other contexts are beginning to spill into equity crowdfunding through new market entrants, who provide more accessible presentation of financial data to prospective investors for a fee. The overall goal of this Part is to demonstrate the need for better financial data presentation through equity crowdfunding portals, which is the topic of Part III.
A. Information Asymmetry and Presentation of Financial Information on Portals
Legal scholarship about capital raising for startup ventures has placed significant focus on the issue of information asymmetry. For the purposes of this Article, the Author will utilize two definitions of information asymmetry to gain a full understanding of the topic. First, Gilson and Schizer define information asymmetry in a general context, stating that the term “refers to circumstances in which one party knows more about a particular fact relevant to the business than the other party does.”[92] Schwartz builds on this definition by defining it in the startup investment context, stating that “there is certain information that is known to founders, promoters, managers or other insiders, but not investors.”[93]
While all financial contracts present forms of information asymmetry, these contracts in the context of capital formation for startups are often amplified.[94] For example, startups that rely on technological innovation often cannot fully explain the strengths, weaknesses, risks, and opportunities involved with a technology they plan to bring to market to interested investors.[95] While this is true of startups raising capital from experienced, professional investors, it is perhaps even more true in cases where startups raise capital from inexperienced, non‑accredited investors via Regulation CF due to the uniform disclosure requirements for issuers and the limited ability to ask the issuer for additional information.[96] In fact, information asymmetry may be greatest in Regulation CF offerings given the unique nature of involving inexperienced counterparties as investors.[97]
This information asymmetry may be increased in cases where the issuer is providing something other than common stock in exchange for the investment. For example, many Regulation CF issuers choose to follow the startup best practice of raising capital in exchange for preferred stock, a convertible note, or a Simple Agreement for Future Equity (SAFE) rather than in exchange for common stock.[98] In the case of a SAFE or a convertible note, many investors may not realize that they actually hold no equity in the issuer until another investment round occurs.[99] While investors holding a convertible note are creditors of the issuer until the note converts from debt to equity, investors who hold a SAFE simply own a right to future equity, if a future investment round occurs.[100] This is one example of a clear information asymmetry in the equity crowdfunding context that would not exist in an investment scenario including a professional investor.
Another information asymmetry in equity crowdfunding occurs when some issuers choose to push the envelope by issuing digital coins or tokens held on the blockchain in exchange for investment capital, despite unclear guidance as to whether this consideration is a security.[101] While professional investors may make a significant enough investment to learn deeply about a new technology (or ensure they understand it already), non‑accredited investors through Regulation CF offerings are unlikely to take time away from life’s obligations to gain such expertise, especially given the investment limits placed on them by the SEC.[102] Certain features of equity crowdfunding portals, like discussion boards for investors to share information and ask issuers questions, may allow everyday investors to wield power and reduce information asymmetry.[103] However, it is extremely difficult to completely erase information asymmetry,[104] and given the lack of due diligence Regulation CF investors are able to complete on an investment opportunity, information asymmetry is likely to remain high in these cases.
With respect to mitigating information asymmetry, disclosure requirements are one of the primary ways to accomplish the task.[105] Unfortunately for equity crowdfunding investors, a 2020 empirical study by Mercer Bullard found that noncompliance with the main disclosure requirements within Regulation CF has proved common among issuers.[106] While intermediaries have an obligation to have a “reasonable basis for believing that” issuers have complied with applicable law, including the disclosure obligations imposed by Regulation CF, there is clearly a lack of monitoring by crowdfunding portals given the data demonstrated by Bullard.[107]
Lastly, scholars have contemplated whether mandatory disclosure even matters when the typical investor is unlikely to enjoy familiarizing themselves with the disclosure material or unable to take away meaningful information from the professional disclosure materials.[108] The remainder of this Part runs with that premise by looking to other disciplines for research‑backed guidance on how best to present complex information to novices, and then by reviewing a given industry’s best examples of how financial data is presented to investors. In looking to these two sources of guidance, the Author seeks to build a framework for presenting financial information about equity crowdfunding issuers in a better way.
B. Best Practices Regarding Financial Data Presentation to Novice Investors
Scholars have previously noted that one of the worst elements of the CROWDFUND Act, and ultimately, Regulation CF, is the requirements it places on portals to manage important disclosures.[109] Potential liability for errors and omissions in the disclosure management process, scholars say, actively discourages the parties best suited to be intermediaries from participating.[110] However, since equity crowdfunding went live in the United States in 2016, willing and capable intermediaries like Wefunder and StartEngine have entered the equity crowdfunding space and served an important role in facilitating investment in issuers through Regulation CF.
Nevertheless, there are best practices derived from scholarship in finance which should be used to improve the way equity crowdfunding intermediaries display financial disclosures to prospective investors. This Section seeks to share those practices. For example, the SEC requires two main documents from issuers: Form C and financial statements. This Section seeks to explore the wisdom of presenting the disclosures contained in those documents in a different form that is perhaps more suitable for novice investors.
First, an impactful finding from finance literature dictates that text‑based reporting of financial data is complex and inaccessible to a large number of inexperienced investors.[111] In this context, text‑based reporting of financial data includes “footnotes, letters from executive leadership[], [corporate] strategies, [information about the] leadership team, shareholder details, and various reports including management report[s], sustainability report[s], [and] corporate governance report[s].”[112] This should give us pause about the value of SEC‑mandated disclosures like those found on and alongside Form C.
For example, in Clockwork’s Cover Page to Form C, filed with the SEC, it provides a significant amount of written data (likely drafted by the company’s attorneys) related to the offering, the company’s leadership and business plan, risk factors working against the company, the planned use of funds, and the company’s financial condition.[113] Altogether, the document is twenty‑one pages long and provides significant detail to prospective investors about the opportunity to purchase future equity in the company.[114] However, the written data provided is largely boilerplate legal disclosures that would be found within any issuer’s Form C. Novice investors, and even seasoned business professionals, will likely have difficulty discerning the boilerplate disclosures from the disclosures that are meaningfully different from issuer to issuer.[115] Further, the platforms themselves work to integrate these disclosures into the portal site, but the summary of information provided on the portal arguably emphasizes the boilerplate and leaves out highly relevant, company‑specific data for investors.[116] To Wefunder’s credit, the portal does provide an “At a Glance” section, detailing the issuer’s most recent fiscal year financials in a graphics‑heavy format.[117]
Additionally, in her dissertation, Priyanka Meharia studies the use of visualization in digital financial reporting and shared how “[e]ffective visualization tools are of great importance in supporting decision‑making because when visualization tools are inadequate, decision‑making performance is impaired. Visualization tools amplifies [sic] cognition, perceptual information processing and facilitates knowledge generation.”[118]
Meharia further discusses past research in the area of data visualization and concludes that data visualization can assist users in the following ways: as a memory aid and a representation aid, by supporting parallel processing in the brain, by providing support for creative thinking and insight, by helping users to recognize patterns in the data, and by providing content for persuasion.[119] Applying these findings to equity crowdfunding, better data visualization practices by crowdfunding portals can assist novice investors in recalling financial data about a given issuer, comparing investment opportunities, locating worthwhile investment opportunities, and noticing patterns in specific investment opportunities that make them desirable or undesirable. Lastly, past research has also demonstrated that similar data visualization tools can assist users who are visually impaired with accessing financial data and learning about investing generally.[120] This finding supports the hypothesis that better data visualization practices on equity crowdfunding platforms would create a more inclusive and educational learning environment for novice investors, as well as those with visual challenges that can make processing financial data in traditional formats difficult.
The SEC has recognized many of the points made above and implemented various interactive data requirements for issuers and filings over the past two decades. While the format has varied based on the specific disclosure or filing, the SEC has made available to issuers fillable forms or required issuers to “tag” data in Extensible Markup Language (XML) format.[121] In both cases, the data provided by issuers can then be visualized using most typical data visualization programs. In the equity crowdfunding context, interactive data requirements were included in the rulemaking process as proposed rules,[122] and interactive data is now a requirement of Form C.[123]
One of the biggest challenges to making this required interactive data useful for investors is access to and knowledge of how to operate relevant data readers. Certainly, professional investors have access to and knowledge of how to use data reading software to visualize data in a meaningful way. In these cases, professional investors can simply import the data into a program like Power BI or Tableau and create the graphics, charts, and insights they seek.[124] However, even though non‑accredited investors can access free, limited versions of these software programs,[125] they may not have the knowledge of how to take XML data in the form of code on SEC forms and translate it into meaningful investor insights. Thus, access to data visualization interfaces and education on how to use them are obstacles to interactive data being useful for the typical equity crowdfunding investor.
C. Examples of How Data is Effectively Presented to Investors
In nearly every investment context, third parties have entered the conversation by providing easy to comprehend data on investments. For many investors, this data serves as an informal recommendation system, encouraging the investor to place their capital in highly rated investment vehicles. This Section seeks to evaluate the range of third‑party investment data systems that exist for investors in the United States. Importantly, this Section does not limit itself to systems for evaluating equity crowdfunding investments or even startup investments generally. Instead, this Section seeks to show a wide range of financial data intermediaries available to investors in any investment context, even if the list is not exhaustive.
The discussion will begin with investment rating systems. Perhaps the most well‑known investment rating system comes from Morningstar, which provides investors with ratings on a one‑star to five‑star scale for many types of securities.[126] Morningstar’s ratings are entirely based on the past performance of the security, taking performance ratings compiled over the last three, five, and ten years and blending them into an overall rating.[127] Performance is measured as the security’s risk‑adjusted return, which “is calculated by subtracting a risk penalty from each fund total return, after accounting for all loads, sales charges, and redemption fees.”[128] Morningstar compares and rates similar securities or funds consisting of similar assets, with the top 10 percent of securities receiving five stars, the next 22.5 percent of securities receiving four stars, the middle 35 percent of securities receiving three stars, the next 22.5 percent of securities receiving two stars, and the bottom 10 percent of securities receiving one star.[129]
Investors and investment advisors regularly rely on Morningstar’s ratings to make investment decisions.[130] However, multiple forms of research have shown that Morningstar’s ratings, based on past performance, are a relatively unreliable way to predict future performance.[131] In fact, research from The Wall Street Journal demonstrated that “the [future] performance of [mutual] funds with different initial star ratings converges” with the average rating of a five‑star fund being 3.0 stars after a ten‑year period.[132] By comparison, a four‑star fund has an average rating of 2.8 stars after ten years, a three‑star fund 2.5 stars, a two‑star fund 2.2 stars, and a one‑star fund 1.9 stars.[133] Morningstar itself cautions investors that its Star Rating system is only “moderately predictive.”[134]
Despite the inherent limitations of Morningstar’s rating system, mutual funds with high ratings typically see a large inflow of investment capital upon receiving the rating.[135] Conversely, money tends to flow out of a fund quickly if that high rating is lost.[136] Clearly, investors are using this rating systems as a shorthand guide to make investment decisions amongst a sea of options.
In the universe of publicly traded equities, Charles Schwab provides an “Equity Ratings” service to those who use its trading platform.[137] This service rates roughly 3,000 stocks traded in the United States based on “a disciplined, systematic approach that evaluates each stock on the basis of a wide variety of investment criteria from five broad categories: Growth, Quality, Sentiment, Stability and Valuation.”[138] Importantly, this service also strays from Morningstar’s service in the sense that it is forward‑looking, and not backward‑looking.[139] Charles Schwab further defines its evaluation categories as growth, quality, and sentiment.[140] Stocks with high growth scores have high profitability growth and high expected dividend growth but lower than expected sales growth.[141] Stocks with high quality scores have “high profitability, high earnings quality, conservative investment spending and better operating efficiency.”[142] Lastly, Charles Schwab defines stocks with higher sentiment scores as having “attributes such as recently improving analysts’ outlooks, strong and consistent price performance, and optimistic trading positions and trends.”[143]
Stocks that fall into the top 10 percent of Charles Schwab’s formula receive an Equity Rating of an “A” and stocks in the 11th through 30th percentile are rated a “B.”[144] In both cases, Charles Schwab advises its clients to buy these stocks, as they are expected to outperform the market over the next twelve months.[145] The bottom 30 percent of stocks receive “D” or “F” grades, and Charles Schwab advises its clients to sell these stocks, given a predicted underperformance compared to the market over the next twelve months.[146] The middle 40 percent of stocks receive a “C” rating and a hold recommendation from Charles Schwab.[147]
This type of financial data and analysis is not limited to investments in public companies and mutual funds. Resources exist to assist investors in navigating the private financial markets too, including in the equity crowdfunding space. Since 2018, a website called Kingscrowd has hosted an investment ratings platform for companies conducting offerings online through Regulation CF and other exemptions that allow for similar online‑based campaigns.[148] According to the site, “[t]he Kingscrowd rating methodology uses five key metrics—Price, Market, Differentiation, Performance, and Team—to numerically rate every actively crowdfunding startup.”[149] Interestingly, these company ratings are then compared to other companies who are actively raising capital through similar offerings and provide each company with a one to five score (five being the highest).[150] Of course, if all the issuers are lemons, some of those lemons will still receive the highest investment grade under this system.[151] This is one major challenge to an equity crowdfunding ratings system that necessitates that some investment opportunities receive high ratings. This topic will be discussed in greater detail in Part III.
Kingscrowd ratings also vary from week‑to‑week because some issuers complete their fundraising efforts each week and other new issuers enter the fundraising stage.[152] This certainly creates a more entertaining experience for Kingscrowd users, who may see an issuer’s rating vary over time. However, it also requires investors to take the approach that the ratings assume they will make an investment in the best startup today, rather than waiting to see if there is a better use of the investor’s capital later. After all, an issuer rated a five today could be rated a three next week.
Regarding the metrics used to construct these ratings, Kingscrowd pulls data from a variety of sources.[153] Some of that data is pulled from the SEC‑required financial disclosures, data which provides prospective investors with a clear look at the financial picture of an issuer. However, that data is also mixed and conflated with other sources which may not be as unbiased. For example, Kingscrowd uses data from an issuer’s pitch deck, the PowerPoint presentation companies use to convince investors to provide capital, and the company’s website and blog, which may consist of public relations materials over substantive financial analysis.[154]
Once this data is pulled, Kingscrowd continues to use the comparative format as it evaluates the five criteria set forward. With respect to “price,” Kingscrowd generally acknowledges that a higher issuer valuation should mean a lower score but prefaces that by stating its ratings are done on a comparative basis, both against all other active issuer and issuers from the same industry.[155] The “performance” metric also relies mainly on financial data presented by the issuer, like revenue, revenue growth, assets, liabilities, and key items.[156] However, the other three key criteria (market, differentiation, and team) rely on Kingscrowd analysts to make comparisons and collect data points and, from there, to plug those items into Kingscrowd’s proprietary algorithm.[157]
If an investor relies on the Kingscrowd ratings as is, they assume that Kingscrowd’s analysts are making dozens of correct assumptions. Further, the investor assumes that at least some equity crowdfunding issuers are worthy of an investment at any given time. Additionally, an investor must believe that these insights are worth paying for, as Kingscrowd charges users for access.[158] User can choose to pay either $150 per year or fifteen dollars per month for unlimited access to Kingscrowd data and ratings.[159] Alternatively, users can pay ten dollars per company to access Kingscrowd’s data and report for that specific issuer.[160] For non‑accredited investors who are limited by law with respect to how much they can invest, $150 per year represents a significant portion of capital to spend with the promise of no financial return on that investment. For example, a non‑accredited investor who is legally permitted to invest $5,000 per year in Regulation CF offerings would spend roughly 3 percent of that capital on a Kingscrowd subscription just to access the data and insights. Despite these high costs and the dubious value of the service, Kingscrowd’s place in assisting investors in making financial decisions is not contemplated in any other law review article as of this writing.
Another service for equity crowdfunding investors, Hubtas, launched in 2023 as a competitor to Kingscrowd. Hubtas offers investors far more value within its free product offering, as prospective investors can create investment criteria and receive a curated list of companies matching those criteria via Hubtas’s “Startup Search” function.[161] A similar feature is paywalled on the Kingscrowd site.[162] Hubtas allows investors to choose from filters like type of security, market capitalization, net profit or loss, and minimum investment.[163] This is a useful, free resource for prospective investors who want to narrow down the universe of investment opportunities to a more manageable list to research further.
Hubtas also has a paid product which allows users to access additional metrics in the “Startup Search” function and to create customized algorithms that will help them to further curate a list of prospective issuers.[164] This product also provides the ability to receive daily alerts when new issuers meet the investor’s stated criteria.[165] Lastly, Hubtas has built a proprietary artificial intelligence tool, like ChatGPT, that allows users to ask for information on issuers and the equity crowdfunding process.[166] At ten dollars per month (or $120 per year), the cost for this product is more reasonable when compared to Kingscrowd.[167] However, Hubtas is a startup itself, and the offering is less developed than what Kingscrowd offers to its customers. The cost of Hubtas’s service would also eat up the first 2.4 percent of an investor’s yearly return, for the same investor who places $5,000 of capital into an equity crowdfunding offering each year.
In all cases, these financial data providers seek to avoid liability for the data they provide to users. One major theme is that the companies themselves explicitly state that they are not providing financial advice, or alternatively, place the burden of any expressed opinion on another person or entity.[168] For example, in Kingscrowd’s Terms of Use, there is a section titled “Reliance on Information Posted” which reads:
The information presented on or through the Website is made available solely for general information purposes. We do not warrant the accuracy, completeness or usefulness of this information. Any reliance you place on such information is strictly at your own risk. We disclaim all liability and responsibility arising from any reliance placed on such materials by you or any other visitor to the Website, or by anyone who may be informed of any of its contents.
This Website may include content provided by third parties, including materials provided by other users, bloggers and third‑party licensors, syndicators, aggregators and/or reporting services. All statements and/or opinions expressed in these materials, and all articles and responses to questions and other content, other than the content provided by the Company, are solely the opinions and the responsibility of the person or entity providing those materials. These materials do not necessarily reflect the opinion of the Company. We are not responsible, or liable to you or any third party, for the content or accuracy of any materials provided by any third parties.[169]
Further, Kingscrowd uses a traditional disclaimer of warranties statement as well as a limitation on liabilities statement in its terms of use.[170] All users of the site are bound to the terms of use as a condition of using the site.[171] For users who make a purchase on the Kingscrowd site, the company goes even further to disclaim liability in its Terms of Sale agreement.[172] Among other statements, Kingscrowd says:
The Deliverables purchased by you are for informational and illustrative purposes only and do not purport to provide any financial advice whatsoever. You may not rely on the statements contained therein and the Deliverables should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.[173]
Further, Kingscrowd states that individual customers must make their own independent financial decisions regarding a given issuer, and that site customers are “capable of understanding and assessing the merits of a course of action and related risks.”[174] Hubtas provides similar language in its Terms of Use under a heading titled “No Investment Recommendations or Professional Advice.”[175]
Next, in Part III, this Article will discuss the need for enhanced financial data presentation to investors through equity crowdfunding portals. Additionally, this Article will consider the question of whether this proposal is best served as a legal requirement or as a best practice adopted through private ordering by the key players of the equity crowdfunding ecosystem in Part IV. The goal of these two parts is to outline a better future for equity crowdfunding investors, where relevant, accurate, and easy to navigate financial data is available on equity crowdfunding portals free of charge to investors.
III. Possible Proposals for Data Visualization in Equity Crowdfunding Offerings
First, this Part focuses on how the equity crowdfunding ecosystem can integrate visualization elements into the financial data presented about issuers on equity crowdfunding portals. Then, this Part will discuss sharing visualization features that would be useful to investors, irrespective of whether they could be implemented through regulation, private ordering, neither, or both. Later, in Part IV, this Article will focus on how these ideas could be implemented through SEC regulation or private ordering, and which implementation system best serves the goals of investor protection and efficient capital formation.
To begin, observers may wonder why the current environment of data presentation about issuers to prospective investors in equity crowdfunding is a problem. After all, prospective investors are able to access all SEC‑mandated disclosures via the portal, and investors who want additional data on issuers can access it for a fee through services like Hubtas and Kingscrowd.[176] The very existence of these data providers might suggest that the market has spoken and the paid version of this solution is sufficient to combat any information asymmetries present between issuers and prospective investors. This Article argues the opposite position, that access to sophisticated financial data about issuers should be available free of charge to all investors via equity crowdfunding platforms.
The biggest issue with having private interests charge prospective investors for financial information, analysis, and insights on equity crowdfunding issuers is that many equity crowdfunding investors are non‑accredited, and thus, limited in the amount of capital they may invest each year through Regulation CF offerings. As an example, a non‑accredited investor with an annual income of $100,000 and a net worth of $100,000 has an investment limit of $5,000 during any twelve‑month period under Regulation CF.[177] For an investor who is restricted to $5,000 per year in Regulation CF investments and is unlikely to see a return on his or her investment for a decade, a fee of $300 per year on Kingscrowd or $120 per year on Hubtas is significant.[178] In fact, the investor would be paying away the first 8.4 percent of their return on the privilege to access superior information about issuers via a subscription to both services, which may be difficult to recoup through a more informed investment strategy.
Given this significant challenge in overcoming the cost of accessing superior financial information about issuers, the Author recommends that portals partner with these data providers to make more sophisticated financial information about equity crowdfunding issuers available to prospective investors on the portals. There are two main ways in which this could occur. First, under a private ordering option, portals could elect to make their platforms more attractive to investors by providing superior financial data, ratings, and visualization capabilities to prospective investors. Portals could easily achieve this goal through licensing the technologies developed by current players or by building their own technology that provides superior financial data presentation.
In fact, an equity crowdfunding portal in the United States would likely stand out if it adopted this strategy, as most portals compete for issuers and expect the investor traffic to follow.[179] This makes sense to a degree, as issuers are ultimately the paying customers of the portals through their payment of a percentage of their successful fundraising campaign to the portal for its hosting services.[180] However, this strategy, adopted by nearly every equity crowdfunding platform, leads to extensive services and benefits for issuers,[181] and little to no features, benefits, or educational opportunities for non‑accredited investors.[182] If one or more portals broke away from the pack and adopted a more investor‑centered business model, a good place to start would be to bolster the financial insights provided to prospective investors through the portal by partnering with an existing data service like Hubtas or Kingscrowd. While the data provided through these third parties would be an expense to the portal, the hope for that individual portal would be that investors would demand greater transparency from portals and issuers by becoming a patron of the portal that provides superior financial data, ratings, and visualization elements. Of course, if investors opted to invest only on a specific portal site en masse, the issuers would follow the investors to that portal too.
However, it is reasonable to be skeptical that this strategy would be wise for a given portal. If issuers expect to have a more difficult time raising capital on one portal versus another, there is no reason for them to choose the more difficult path. Without interesting, dynamic investment options on a portal, prospective investors have little reason to continue to frequent the site.[183] This logic implies that private ordering may not work in this instance, making regulation a better solution to the problem. With this alternative, the SEC might require, through revisions to Regulation CF, that platforms provide prospective investors with easier access to the most relevant financial data about issuers. Additionally, the SEC might require portals to add ratings, filtering options, and data visualization elements to each issuer’s fundraising page.
These additional regulations, if adopted, should avoid being too prescriptive.[184] By requiring some action from portals while providing them with wide latitude with respect to how they choose to comply with the requirement, the SEC could provide an enhanced experience for investors while leaving room for the portals to provide important issuer data in unique and innovative ways. Some portals may choose to partner with existing issuer data services, while others might elect to build their own tool with new features. Portals should provide qualitative and quantitative data that can be filtered and sorted by individual users, based on their personal investment preferences. Alternatively, tools that make assumptions about an individual investor’s preferences and the suitability of a given investment for that investor are less useful and should be avoided.
Assuming portals adopted at least some of these features through either private ordering or regulation, the remainder of this Section discusses some key decisions portals may make in presenting superior financial data about issuers to prospective investors. These recommendations are made with prospective investors’ best interests in mind, although the recommendations also consider the health of equity crowdfunding as an exemption to securities registration and as its own industry. Thus, issuer, portal, and third‑party service providers’ interests are also considered, to the extent that these parties need to continue to have incentives to participate in equity crowdfunding for the ecosystem to function optimally.
The first major decision portals would need to make pertains to issuer ratings. One data website, Kingscrowd, provides ratings on different equity crowdfunding issuers that oscillate each week.[185] Ratings on Kingscrowd are made on a comparative basis, meaning each issuer is rated on a wide menu of criteria, then ratings are issued based on how an issuer performed on those financial metrics when compared to all other issuers.[186] Alternatively, the other main equity crowdfunding financial data site, Hubtas, provides different “scores” which might serve as ratings on individual issuers.[187] For comparison’s sake, ratings of investment opportunities are quite common in other investment contexts, like Morningstar’s ratings of stocks and mutual funds.[188]
This Article proposes that portals choose not to use comparative ratings of issuers, especially those ratings systems that require some investments to be rated highly at any given time. While comparative ratings are helpful in certain contexts, like Morningstar’s ratings of mutual funds discussed in Part II, comparative ratings are not a good fit in the equity crowdfunding context. In the Morningstar example, comparative ratings are helpful for novice investors because all investment options presented to those investors are relatively safe. Mutual funds are investments that consist of a diversified portfolio of many different stocks, bonds, and securities, most of which are likely to remain a going concern for the foreseeable future, and some of which will yield a positive return.[189] Given the makeup of this investment option, novice investors are unlikely to lose their entire investment, and further, become more and more likely to see a positive return on the investment the longer they hold it.[190] While some of these investments are surely better bets than others, very few of them will be worth nothing to the investor in the end. In these cases, the comparative ratings truly are a question of whether an investment will beat the market, receive a market return, or underperform the market. Given that investors are choosing between investment options that are comparable in risk and reward, ratings can help investors distinguish between those options without encouraging investing behavior that is too risky to be suitable.
Alternatively, equity crowdfunding issuers are generally early‑stage startups or community‑based small businesses.[191] These ventures stand a real chance at going out of business, leaving their investors without their capital invested. Thus, for equity crowdfunding investors, the question is not which of these investment options is better, but rather, which of the investment options is worth the risk, given the investment’s potential to increase substantially in value and its risk of ultimately being worth nothing. This is a very different investment decision to make—a decision where a comparative rating system would be regularly harmful to investors. Thus, any rating system used for equity crowdfunding issuers should rate issuers independent of one another and not on a comparative basis.
Under an independent rating system for equity crowdfunding issuers, the rating agency should not be the portal itself due to its clear conflict of interest in the offering succeeding. Additionally, nearly all issuers should receive low marks that accurately reflect the risk of the investment, when considering the issuer’s operating history, financials, and valuation. An example of the risk novice investors face in equity crowdfunding offerings is illustrated by the issuer Navisyo, who successfully raised nearly $1.6 million in 2020 via Wefunder for its online platform for booking boats and “floatels” for vacation and event use.[192] Navisyo unilaterally valued its company at $25 million[193] prior to its Regulation CF offering, despite having zero lifetime revenue and about $400,000 cash on hand at the time of the offering.[194] Thus, any investor in Navisyo’s crowdfunding campaign was essentially making a bet that a company that had never sold a product or service would be worth more than $26.6 million to an acquirer someday—that would be the valuation at which investors would get their money back with no return on their investment. Of course, investor capital is locked up until a liquidity event occurs for the issuer, and due to the time value of money, a dollar tomorrow is almost always worth less than a dollar today. An issuer like this should be an easy zero‑ or one‑star rating under an independent rating system, given the significant growth the company would need to achieve for an investor to avoid losing money on their investment. For issuers to receive a three‑star rating or above, those issuers should be able to demonstrate a high‑potential idea, growing revenue, and a reasonable valuation.
Other key decisions for portals to make would be which financial data points should be emphasized on an issuer’s portal page and which financial data points should factor into any ratings the portal elects to create. First, financial data points that factor into ratings or other simplified metrics should be limited to quantitative data that can be evaluated objectively. For example, revenue, revenue growth, burn rate, and valuation are all data points that will matter to the educated investor, as they demonstrate the issuer’s ability to generate cash, its ability to conserve cash, and how realistically the company views its value today. Simple and informative metrics like these should be factored into any rating system displayed by a portal. In fact, some equity crowdfunding portals already display many of these metrics prominently for issuers who have filed their financial statements and Form C with the SEC.[195]
Alternatively, qualitative data regarding issuers may be valuable to investors, but it should be presented outside of a ratings system so investors can evaluate this qualitative data about an issuer based on the investor’s own reading of the situation. For example, some investors may find it valuable that a founder has startup experience, particularly when that founder has sold his or her company to an acquirer, partially because it implies the founder has capital themselves from the successful growth and sale of the previous venture. Other investors may prefer a first‑time founder due to the implication that this person is “hungry” to succeed. In this example, two investors might read the same qualitative data as meaning two different things, and in each case, the investors are making assumptions that may or may not be true. This example illustrates why qualitative data should be presented as is and without bias from a portal or its rating service.
Next, platforms should better utilize the XML data already required through Form C and SEC‑required financial statements to more effectively present financial data on issuers to prospective investors. Currently, platforms highlight some of the most common financial metrics on an issuer’s portal page and supplement that with a section on relevant risks the issuer faces, in a written format taken directly from Form C.[196] It is unclear if the portals use the XML data provided on Form C to automatically populate this data, or alternatively, if it is manually selected and entered by the portal’s staff. Regardless, this simple display of basic Form C data is of limited use to a prospective investor.
A method for improving the availability of useful information for prospective investors could be to have portals deploy familiar data visualization methods for sorting, filtering, and comparing issuer data. For example, the “Startup Search” feature of Hubtas allows users to filter investment opportunities based on an issuer’s valuation, revenue, profitability, the securities being offered, and more.[197] To date, none of the three main equity crowdfunding portals in the United States offer a similar feature, which limits the ability of a novice prospective investor to find relevant investment opportunities based on key financial criteria. XML data could easily be used to build helpful tools for investors. In fact, Hubtas essentially describes its own site as doing exactly that.[198] Given this head start in building useful tools, the Author recommends that portals turn to sites like Hubtas to either license or acquire its technology through private ordering as a way to integrate these useful insights into their portal. Of course, the regulatory alternative would be to require portals to offer data sorting, filtering, comparison, and visualization tools to their websites, which may ultimately lead to the same private ordering outcome described above.
Even with better data presentation methods available to prospective investors via the portal, there is no guarantee that a given investor has the knowledge needed to understand what some of these key data points truly mean. For example, it is highly unlikely that a novice investor understands the difference between a convertible note and preferred stock—two common securities sold to early‑stage startup investors.[199] Given this challenge, portals should also consider using comparison, sorting, and filtering tools built into an equity crowdfunding portal to provide integrated investor education at the point of investment. To build on the previous example, an investor who elects to sort investment opportunities by security type may realize that they do not know the difference between common stock, preferred stock, convertible notes, and future equity. Written and video content that can be accessed in one click through the same filtering mechanism provided on the portal site would be an easy and effective way to encourage investors to make more informed financial decisions. Again, this type of integration could be achieved through private ordering or additional regulations and would be a clear value‑add for investors, who currently must seek out the sparse investor education portions of portal websites or find the information they seek through other means.[200]
Lastly, as equity crowdfunding matures and has a longer track record of success, platforms should consider gathering historical data on successful issuers to look for patterns with respect to the qualitative and quantitative data those companies showed when seeking investment via Regulation CF. Insofar as platforms can spot patterns of issuers with the potential for future success and highlight those opportunities for investors, they should do so. Of course, Regulation CF has only been available for seven years as of the writing of this Article, and given that the typical investment fund operates on a ten‑year horizon, meaningful data for an effort like this one will not be available for some time.
IV. Who Should be Responsible for Enforcing This Proposal? Should it be Implemented through Private Ordering or a Legal Requirement?
The goal of Part IV is both to weigh the benefits and drawbacks of making the above ideas a part of additional SEC regulations that impact portals and issuers and to encourage those ideas as part of a set of best practices the portals and issuers adopt through private ordering. While the goal of this Article is to create a better‑functioning equity crowdfunding ecosystem in the United States that can be sustainable for generations to come, the Author believes that both solutions above should be a part of that future. Thus, this Article ultimately argues for light‑handed regulations that require portals to provide significant data visualization elements for issuer financial data, without specifically prescribing how a portal should meet the requirement in Part V. Thus, Part IV seeks to tee up that proposal by discussing why portals should be required to provide better data visualization components within their website for investors seeking to research investment opportunities, and why portals should be able to choose how to achieve that goal on their own through private ordering.
A. The Case for Private Ordering
First, this Section addresses the wisdom in leaving financial data display and visualization up to the portals and issuers themselves through private ordering. An investor‑friendly feature like enhanced issuer financial data visualization could be a huge competitive advantage for any portal that chose to implement it with respect to attracting investors to the portal.[201] It may also mark the start of portals competing for investors through the inclusion of investor‑friendly features. To date, portals have largely opted to compete for issuers, assuming the investors will follow if enough compelling issuers choose to list their offerings on a given portal.[202] Flipping that paradigm would be positive for the equity crowdfunding ecosystem: investors could use this access to get better insight and information about issuers to wield more power overall. In the current regime, investors largely face take‑it‑or‑leave‑it investment opportunities where an issuer sets all the terms of the investment, including the company’s valuation.[203] Further, investors have little ability to glean a clear picture of an issuer’s prospects before making each investment decision—a subject of this Author’s prior research.[204] This one‑two punch of information asymmetry and market failure makes it challenging for investors to have success through equity crowdfunding, as it is currently situated.
Research has also shown that ecosystems that use an equity crowdfunding system predicated on private ordering tend to perform better and grow larger in the medium‑ to long‑term.[205] Examples of such ecosystems can be found in the United Kingdom and New Zealand. Indeed, neither the United Kingdom nor New Zealand require issuers to disclose their financial information through GAAP‑compliant financial statements.[206] Interestingly, however, there are many examples of issuers in those countries that decide to disclose the company’s finances anyway, presumably in an effort to attract investor capital.[207] While these disclosures are not made in the traditional format, and arguably provide less depth for financial professionals to analyze, many non‑accredited investors might argue that the creative license provided to these issuers to present financial data in any way they choose works to the benefit of most of the crowd.[208] For example, an issuer named Mevo on New Zealand’s Snowball Effect portal provides financial information about its company to investors through key numbers, easy‑to‑read charts, and one‑paragraph explanations within its offering page.[209] However, it is important to note that Mevo was not legally required to provide these disclosures in New Zealand.[210] Insofar as the United States seeks to create an optimal system for better visualizing financial data, it might choose to blend basic regulatory requirements with the freedom for issuers and portals to choose their method of compliance through private ordering.
One argument for why a system of private ordering works best lies in the portals themselves. In theory, portals should have significant economic incentives to act as responsible gatekeepers, only allowing issuers access to the portal’s investors when the portal believes the issuer has a good chance at success.[211] However, portals make a commission, typically 6 to 9 percent of an issuer’s total capital raised, by listing companies on their portal and helping the company raise capital successfully through various value‑add services along the way.[212] Additionally, portals may also receive carried interest—or a “carry”—defined as “the percentage of a[n issuer’s] investment profits that a [portal] receives as compensation.”[213] Various equity crowdfunding portals take a carry on the profits investors earn from their investments as an additional revenue stream, and the carry can be significant, anywhere from 2 percent to 7.5 percent of investors’ total investment earnings.[214] In his book, Investment Crowdfunding, Andrew Schwartz argues that this carry represents additional “skin in the game” for portals, as the portals themselves have invested time and resources into helping the issuer achieve success.[215] As the logic goes, portals make money by helping issuers raise capital, and further, portals have the opportunity to make more money in two ways if investors achieve a return on their investment: (1) through the carry earned, and (2) through having both issuers and investors back additional future transactions.[216]
Another reason to consider private ordering as a good solution to the financial data presentation challenge on equity crowdfunding portals is that some of the proposed features and functions discussed in this Article do not lend themselves well to regulation and rulemaking. For example, how would the SEC hold portals accountable (if at all) for insights on a specific issuer’s financial status that are tantamount to a recommendation?[217] Features like investment ratings, while potentially useful to novice investors, are additions of which the portals may prefer to steer clear given some of the pitfalls that may emerge. At the very least, a savvy portal would choose to feature a third party’s rating service rather than create its own, given the conflicts of interest inherent in listing issuers on its site and then rating their desirability.
Overall, there is a new set of risks inherent in creating a system that provides more financial data and better financial data presentation to prospective investors through the portal. The SEC may feel the need to regulate these risks and hold portals accountable for errors, inaccuracies, or misrepresentations of the data, as well as data that serves a function similar to making a recommendation to a prospective investor.[218] For these reasons, the Author recommends keeping SEC requirements narrow in relation to the portal’s responsibility to investors with respect to data that might resemble investment advice. For example, requiring portals to display limited data‑like revenue, burn rate,[219] valuation, and revenue growth in a graphic format, and further, requiring portals to provide multiple data visualization tools, would be a good middle ground.[220] However, regulations should leave financial data and visualization tools that resemble recommendations as optional for portals, and further, should allow portals to contract around liability for that data resembling recommendations through terms of service agreements with investors.
B. The Case for Some SEC Regulation
The best argument for requiring additional SEC regulation to enforce this proposal is that we may be experiencing a market failure because equity crowdfunding portals do not have sufficient motivation to act in the best interest of equity crowdfunding investors. One could argue that portals have made the educated business decision to build issuer‑friendly websites, knowing that this approach is best for their bottom line. After all, the revenue that portals earn today comes from issuers holding successful capital campaigns on their website.[221] While some portals may also earn carried interest on investment earnings, that revenue is uncertain and may never occur.[222] If portals truly believe that becoming investor‑friendly will cost them issuers that will have successful campaigns on their platform, they may be unwilling to forgo this important source of immediate revenue.
Additionally, individual portals may be concerned that they would be placed at a competitive disadvantage by being the first mover in the financial data visualization arms race. Insofar as issuers are not keen on easier‑to‑understand financial data for investors, a portal may correctly assume that adding this feature would harm its ability to recruit issuers to the portal, and thus, negatively impact the portal’s revenue. One way to avoid a given portal being placed at a competitive disadvantage by becoming more investor‑friendly would be to require all portals to adopt a set of proposed investor‑friendly features. Regulations would need to balance two countervailing considerations. On one hand, specific regulations that enumerate what is required of a portal are more likely to create an environment where investors receive the financial data they need in the best possible format, without placing any one portal at a competitive disadvantage with respect to issuer recruitment. On the other hand, detailed and specific regulations are harmful to issuers in all the ways discussed in Section IV.A above.[223]
Additionally, portals may be concerned about reduced successful deal flow if lemons that would have had a successful fundraise will be weeded out by investors through this better presentation of data. By weeding out previously successful lemons, revenue to the portals is reduced, making it more likely for them to fail. This concept can be illustrated by Schwartz’s discussion of gatekeeping in Investment Crowdfunding, as well as how portals earn their revenue.[224] Portals profit when issuers have a successful fundraise, regardless of whether the issuer ultimately makes money for its investors.[225] Portals also profit if they take a carry and the issuer also succeeds, but note, these portals take this carry in all issuers they choose to list.[226] Interestingly, this “investment strategy” by portals—making (or taking) a small investment in many new ventures—resembles that of many professional investors. In effect, portals and professional investors both receive a lot of “lottery tickets”—high‑risk, high‑reward investments—through their carry or their financial investment. Most of these lottery tickets will be worth nothing, but a few will pay off spectacularly, which can more than compensate a financial investor for the capital it has lost in its many failed investments.[227]
However, there is one key difference: Portals are not investing their own capital to receive this potential upside through the carry. Instead, the portals “invest” through the service they offer to investors and issuers, a service the portals would provide to the issuers regardless of whether they receive the carry.[228] In fact, many portals provide this service without receiving a carry at all because portals already profit from this service through their commission after each successful fundraise.[229] Further, it is likely that portals need to be profitable through this commission alone to survive financially, given how long it takes issuers to experience a liquidity event that returns capital to investors (and the portal through its carry).
Viewed this way, portals do not have nearly as strong of an incentive to be an effective gatekeeper, as Schwartz argues in Investment Crowdfunding.[230] Portals will run a profitable business through hosting successful securities offerings for issuers and by attracting as much investor capital as possible. Investor success is uncertain and will not occur for up to a decade into the future, which means investors may not start to question the wisdom of their investments for quite some time.[231] In the meantime, investors may continue to be active on portals, investing thousands more and providing further profits to the portals through the portal’s commission on each successful offering. While portals genuinely do hope the securities offerings they host turn out to be good investments for the portal’s investors, a portal’s incentive to host only good investment opportunities is vastly overstated by gatekeeping theory. The carry portals receive in the event an issuer has later success is tantamount to a lottery ticket the portals did not pay for—it is essentially a nice‑to‑have bonus. While Schwartz acknowledges this risk, and others, in Investment Crowdfunding,[232] this Article chooses to emphasize the risk as one that makes regulation an important element of any proposal on financial data presentation in equity crowdfunding.
Further, this argument lends itself to the idea that the United States system of regulating equity crowdfunding more strongly than jurisdictions who elect to take the private ordering approach may have been correct all along. The United States is unique in its level of entrepreneurial activity, its attitudes toward being entrepreneurial, and its systems for financing new ventures efficiently through venture capital and angel investment.[233] Thus, equity crowdfunding in the United States serves different purposes than it does in the ecosystems that regulate equity crowdfunding through private ordering.[234] In some of those ecosystems, equity crowdfunding is the main way to finance new ventures.[235] Those jurisdictions depend on equity crowdfunding to fund large swaths of entrepreneurial activity, so it is logical and practical to remove any and all unnecessary barriers to funding for issuers.
In the United States, equity crowdfunding is one way of many to raise capital for a new venture, through which a small amount of capital will be deployed relative to the total amount of capital that flows to startups each year.[236] Said differently, equity crowdfunding is not a mainstream method of financing an entrepreneurial venture in the United States, as of the writing of this Article. Instead, equity crowdfunding serves different purposes for different ventures. For some ventures, the purpose of an equity crowdfunding campaign is “bridgefunding”—providing the venture with enough capital to prove its concept and reach the stage where it can raise significant capital from professional investors.[237] There is evidence that equity crowdfunding is built for these issuers, namely, the fact that specific portals require all investor shares to be held in a special purpose vehicle (SPV) entity, keeping only one additional investor on the issuer’s capitalization table after the equity crowdfunding round is complete.[238] This allows for new investors in future financing rounds to have an easy understanding of who owns which percentage of the issuer, and further, who controls the voting rights of each ownership stake.
For other issuers, equity crowdfunding can provide enough capital to launch a profitable business, and it is the final stage of capital the venture hopes to raise. These companies have no intention of pursuing growth over profit; instead, they hope to be enduringly profitable small businesses.[239] Equity crowdfunding is the final financing destination for other ventures, not necessarily by choice, but because the issuer appeals to non‑accredited crowd investors but not necessarily professional investors.[240] Examples of these issuers include ventures that appeal to a particular geographic community, a particular interest (e.g., arts, sports), social ventures,[241] or ventures whose founders are mostly excluded from the traditional financing pathways due to lack of professional connections.[242] Fortunately, these outcomes are in line with the original goals of the JOBS Act.[243] Equity crowdfunding was never meant to be the largest method of raising capital for U.S.‑based entrepreneurs. Instead, it was meant to help finance more businesses at an early stage and to provide access to entrepreneurship for more founders, investors, and communities.[244]
In this sense, equity crowdfunding in the United States is a success, and any additional regulations put forth onto issuers and portals should have the goal of fostering more investment in these types of ventures. Further, regulations should have the goal of optimizing which ventures receive this capital; the ventures that will provide good financial returns for investors or have a strong community impact should be given an advantage. In doing so, a greater level of investor protection can be achieved too, by weeding out the lemons and providing investors with a smaller menu of better options. In fact, this is largely what you see in other jurisdictions, including jurisdictions with light sets of regulations like New Zealand.[245]Examples like this provide some evidence that the dichotomy of regulation versus private ordering may not be the only relevant factor in providing a smaller menu of better investment options to investors. As seen throughout this Article, a system of more significant regulation in the United States has led to more equity crowdfunding issuers, not less. Given this pattern, one prediction of the Author is that the number and quality of equity crowdfunding issuers in a given jurisdiction has more to do with the attitudes held toward entrepreneurship by the general public. The United States has a unique culture with respect to entrepreneurial activity, which has fostered both monumental economic successes and unbelievable instances of fraud and failure.[246] Mantras like “fake it until you make it” and the proliferation of “hustle culture” may have more to do with the high number of offerings in the United States than any policy, which suggests that more regulation may be needed compared to other jurisdictions with successful equity crowdfunding regimes.
V. Importance for the Future Viability and Credibility of Equity Crowdfunding
The final part of this Article has two goals. First, it will reiterate a proposal for light‑handed regulation of financial data of equity crowdfunding issuers based on the discussion in Part IV. While the requirement that specific methods of financial data visualization be utilized by portals and issuers is explicitly left out of the proposed regulation, the regulation provides the requirement that at least some of them be adopted through private ordering. Second, this Part will discuss the importance of regulatory and private action on this issue. Equity crowdfunding is at a critical juncture in its history in the United States. Investors should soon expect to see returns on equity crowdfunding investments from the exemption’s earliest years, and further, the dollar amount raised each year through the exemption has remained near record‑highs after a significant spike in activity during the COVID‑19 pandemic.[247] With this level of increased investment activity and the “bill coming due” for early issuers to prove the value of the investment in their company, a significant amount of attention is likely to be focused on issuers and their financial viability soon. This Part will further contemplate how light‑handed regulation of the financial data of issuers can reinforce the legitimacy of equity crowdfunding in the eyes of investors and the public generally.
A. Proposal for the Visualization of Issuer Financial Data
This Article proposes a simple amendment to Regulation CF that would require equity crowdfunding portals to provide investors with at least two significant data visualization tools to assist them with reviewing and understanding issuer financial data. Further, the proposed amendment would provide portals with an inexhaustive list of examples of the types of data visualization tools that would satisfy the requirement. Portals are the correct party upon which to place this requirement because they act as gatekeepers to the issuers seeking to raise capital through Regulation CF.[248] Portals routinely enforce their own set of requirements on issuers hoping to use the portal’s service.[249] Given that, portals can meet the proposed requirement of providing two data visualization tools by implementing the technology on their websites and holding issuers responsible for providing the portal with the required financial data to make the data visualization tools useful prior to allowing a fundraising effort to go live to investors.
All of the data visualization techniques discussed in Part III of this Article serve as appropriate data visualization tools under the proposed amendment to Regulation CF. Thus, portals would be explicitly permitted to use the following data visualization methods to satisfy the two requirements:
- A webpage that provides issuer comparisons through user‑directed filtering and sorting of financial data derived from Form C (similar to Hubtas’s “Startup Search” tool);[250]
- Issuer ratings, provided by a third party that are forward‑looking in nature, not based on comparisons to other issuers, and entirely derived from quantitative data (similar to Charles Schwab’s Equity Ratings);[251]
- Qualitative data presented through charts or other visualization techniques, coupled with key quantitative data like revenue, revenue growth, burn rate, and issuer valuation (if applicable);[252] or
- Advanced, user‑directed data visualization through Form C XML data integrated with a free‑to‑use data visualization tool like Power BI or Tableau.[253]
The above list of “safe harbor” data visualization techniques is not exhaustive, meaning that portals would be free to implement other data visualization methods as one or both of the two required tools. In those instances, the portals themselves may choose to seek SEC guidance with respect to a given data visualization tool through a no‑action letter, which can provide the requesting issuer with assurance that the agency will not take enforcement action against its chosen path forward.[254] From time to time, the SEC should update the safe harbor list of data visualization techniques to reflect the breadth of effective and impactful methods portals have chosen to implement through private ordering. In effect, the new requirement will be put into place to encourage portals to improve investor access to and understanding of issuer financial data. However, the SEC should explicitly state that the means through which portals achieve this goal should remain flexible, at least initially, to allow for portals to be innovative in developing new financial data visualization techniques. Over time, the SEC might choose to create a lengthier, exhaustive list of tools that will meet the requirement, with the grandfathering in of proprietary data visualization tools that were previously allowed by the agency but not listed.
This proposed amendment to Regulation CF is meant to set a minimum standard of what can be expected by investors when they navigate to a portal, peruse investment opportunities, and seek financial data on the most promising issuers. Currently, portals vary significantly in how they present financial data to investors and whether they provide any visual elements to assist investor understanding. The three largest equity crowdfunding portals, by amount of capital raised on their portal in 2023, provide a good example of the current range of assistance investors can expect when reviewing issuer financial data.
The worst portal in terms of issuer financial data presentation is Republic, which relegates issuer financial data to a sidebar on its offering page, and further, only provides investors with a link to the issuer’s Form C.[255] An investor will not find any formal financial data on a Republic offering page, nor will they find any data visualization elements meant to assist their understanding.[256] StartEngine, another commonly used portal, fares better under this analysis. StartEngine provides investors with a text‑based data interface, providing key metrics like price per share and valuation within the offering’s main page.[257] However, users must click on one or more drop‑down menus or links to external webpages to access key financial data found on the issuer’s Form C.[258] Outside of one chart, there are no financial data visualization tools available to investors on StartEngine’s offering pages either.[259] Wefunder is perhaps the strongest of the three major portals in terms of its issuer financial data visualization efforts. Wefunder lists a separate “Details” tab for all issuers who have provided financial data to the portal, and further, makes efforts to pull specific metrics like revenue, gain or loss, and cash on hand from the XML data of Form C.[260] Further, these data points are presented along with emoji‑style graphics, to help them stand out on the page.[261] Two basic charts are provided below those highlighted metrics, meant to highlight whether an issuer is profitable.[262]
Overall, Wefunder does the best job of providing accessible financial data to investors. However, under the Author‑proposed amendment to Regulation CF, Wefunder would need to add another data visualization tool in order to meet the legal requirement. Further, portals like StartEngine and Republic would be nowhere near compliant in their current format and would require significant improvements with respect to their presentation of issuer financial data. Given the current state of issuer financial data presentation on equity crowdfunding portals, the proposed amendment would provide investors with a much stronger chance of accessing key financial metrics in a format they can understand and then use to make stronger investment decisions.
B. Why Regulatory Action is Important
The regulatory action described in Section V.A is important for the future viability and credibility of equity crowdfunding in the United States. As discussed in Section I.C, prior literature on equity crowdfunding concerns itself with the quality of issuers available to non‑accredited investors through Regulation CF—the lemons problem.[263] While the public‑facing narrative of equity crowdfunding has not yet taken such a negative stance of the prospects of most equity crowdfunding issuers, if investor returns fail to materialize on previously successful equity crowdfunding offerings, it certainly could soon. Public perception, and thus, non‑accredited investor perception of equity crowdfunding, is important for the future of the exemption. Without willing non‑accredited investors, equity crowdfunding is no different from other exemptions to securities registration that limit investment to accredited investors.
From the outset, equity crowdfunding in the United States has had noble goals.[264] The exemption, at its best, can provide wealth‑building opportunities to everyday Americans, capital to entrepreneurs who have been historically excluded from fundraising opportunities, and job creation for communities that seek more opportunity for their citizens.[265] These goals highlight the importance of having a well‑functioning equity crowdfunding exemption that balances the goals of capital formation and job creation with the important objective of investor protection. Without quality investment opportunities that are easy to understand, investors will eventually opt out of participating in equity crowdfunding offerings. Further, if investors cease participation in offerings, the equity crowdfunding exemption cannot provide important benefits to society. This demonstrates why reforming the exemption in the best interest of investors is important for equity crowdfunding’s long‑term success in the United States. An amendment to Regulation CF that provides investors with better access to issuer financial data, along with simpler ways to view and understand that data, is an important step toward making the equity crowdfunding exemption a more sustainable one.
Conclusion
Non‑accredited investors have limited access to easily‑understood financial data regarding equity crowdfunding issuers, which limits their ability to take action on the most promising investment opportunities presented to them through equity crowdfunding portals. Given that the quality of issuers on equity crowdfunding portals varies widely, a portal’s emphasis on key metrics like revenue, expenses, burn rate, and the valuation of the issuer can make a significant difference in whether investors encounter important issuer financial information before making an investment decision. Further, the legal regime around equity crowdfunding does not help investors uncover these key data points, despite requiring robust disclosures and compliance measures from both issuers and intermediaries. This presents a significant problem to equity crowdfunding investors, and ultimately, the health of the entire equity crowdfunding ecosystem in the United States.
Congress had lofty goals when it legalized equity crowdfunding—namely, making startup investing (and a new method of wealth creation) accessible to everyday Americans and providing a wider range of small businesses and startups with the funding they need to succeed. It is important for the equity crowdfunding exemption to securities registration to foster those goals in the strongest possible way. This set of goals is the motivation behind this Article, which advocates for a minor revision to Regulation CF that would require equity crowdfunding portals to provide investors with at least two significant data visualization tools to assist them with reviewing and understanding issuer financial data. Portals could choose to utilize existing data visualization concepts like filtering and sorting mechanisms or ratings, or alternatively, choose to create their own data visualization features using existing software programs that allow for sophisticated data presentation.
Research on financial decision‑making by everyday individuals supports the strategy of providing financial data about issuers in a more visual format. In taking this step, lawmakers can help non‑accredited investors avoid poor investment opportunities and select those that provide the best chance at a quality return‑on‑investment. Over time, this can help funnel the finite number of investor dollars available to equity crowdfunding issuers to the issuers with the best chance at success. These successes, in turn, could later assist issuers and portals in growing the amount of capital available to new ventures through equity crowdfunding by using success stories, instead of flashy marketing tactics, as motivation for everyday Americans to invest. Through one minor policy revision, the SEC can move the equity crowdfunding ecosystem to more stable footing in the United States, resembling other countries that have found methods of regulating equity crowdfunding that best encourage the right balance of investment activity in startups and investor protection, given their differing attitudes toward entrepreneurship.
* David is an Assistant Professor of Law and the Director of the JD/MBA Program and the Business Essentials for Lawyers Program at the Thomas R. Kline School of Law of Duquesne University. David’s scholarly works focus on the financing transactions that fuel entrepreneurial ventures at their earliest stages, with a particular interest in equity crowdfunding. The Author would like to thank the participants of the 2024 Huber Hurst Seminar at the University of Florida Warrington College of Business (organized by Robert Emerson) and the participants of the 2024 Academy of Legal Studies in Business Technology Section Research Colloquium (organized by Lindsay Sain Jones and Jennifer Merton). All participants in both events provided valuable feedback on an earlier draft of this Article. In particular, discussants David Orozco and Greg Day provided a thorough reading and feedback, and participants Justin Evans, Hannah Weiser, and Mike Schuster each provided very thoughtful comments. The Author would also like to thank Jennifer Rundels, research librarian at Central Michigan University, for her assistance locating some of the finance research cited in this Article, which was critical to supporting this arguments.
- 17 C.F.R. § 227.100–.504 (2024); see also David Nows, The Local Nature of Equity Crowdfunding, 24 U. Pa. J. Bus. L. 475, 491–92 (2022) (sharing the origins of equity crowdfunding laws in the United States and the requirement that all activity be conducted through an SEC‑approved portal). ↑
- See Frequently Asked Questions About Exempt Offerings, U.S. SEC, https://www.sec.gov/resources-small-businesses/exempt-offerings/frequently-asked-questions-about-exempt-offerings [https://perma.cc/S5VA-3DBP] (last updated June 29, 2024) (stating that “[c]ertain securities offerings that are exempt from registration may only be offered to, or purchased by, persons who are ‘accredited investors’”). ↑
- See Jumpstart Our Business Startups Act, Pub. L. No. 112‑106, 126 Stat. 306 (2012) (describing the JOBS Act); see also Regulation Crowdfunding, 80 Fed. Reg. 71388–401 (Nov. 16, 2015) (to be codified at 17 C.F.R. 200, 227, 232, 239, 240, 242, 269, 274) (describing the SEC’s final rule for equity crowdfunding). According to recent research, 87 percent of households would be categorized as non‑accredited. One of the main goals of the JOBS Act and the Capital Raising Online While Deterring Fraud and Unethical Non‑Disclosures (CROWDFUND) Act was to allow issuers better access to this investor population. See generally Jeff Thomas, Redefining Accredited Investor: That’s One Small Step for the SEC, One Giant Leap for Our Economy, 9 Mich. Bus. & Entrepreneurial L. Rev. 175, 178–79 (2020) (discussing the definition of accredited investor and the demographics of accredited investors in the United States). ↑
- See Andrew A. Schwartz, The Gatekeepers of Crowdfunding, 75 Wash. & Lee L. Rev. 885, 901 (2018) (describing the disclosure requirements of Regulation CF). ↑
- See Jason W. Parsont, Crowdfunding: The Real and the Illusory Exemption, 4 Harv. Bus. L. Rev. 281, 284 (2014) (describing the audited financial statement requirement). ↑
- See 17 C.F.R. § 227.303(a)(2). ↑
- See Seth C. Oranburg, Securities Regulation and Social Media, 52 Loy. U. Chi. L.J. 15, 50–53 (2020) (discussing the social‑media‑like features on equity crowdfunding portals); see, e.g., Detroit City Football Club – Be an Owner of Detroit’s Professional Soccer Team!, Wefunder, https://wefunder.com/dcfc [https://perma.cc/GU3Y-8PJT] (providing an example of an issuer using video, images, and graphics to encourage investment in an equity crowdfunding offering). ↑
- While the CROWDFUND Act itself requires intermediaries to ensure that all investors “review[] investor‑education information, in accordance with standards established by the Commission,” the final rule provides relatively low standards with respect to meeting this mandate. Andrew A. Schwartz, Keep It Light, Chairman White: SEC Rulemaking Under the CROWDFUND Act, 66 Vand. L. Rev. En Banc 43, 57 (2013) (quoting Jumpstart Our Business Startups Act § 302(b), 15 U.S.C. § 77d‑1(a)(4)(A)); see also Regulation Crowdfunding, 80 Fed. Reg. at 71388–401 (discussing the specific disclosures required of issuers). ↑
- See, e.g., Hubtas, https://hubtas.com [https://perma.cc/6NJU-FV7J]. ↑
- See, e.g., Morningstar Ratings 101: What You Need to Know, Morningstar, https://www.morningstar.com/company/morningstar-ratings-faq [https://perma.cc/8TG3-3G53]. ↑
- An important secondary goal of equity crowdfunding is creating a more inclusive startup investment ecosystem. This Article advances that goal by encouraging the investment ecosystem to better filter opportunities for non‑accredited investors. See, e.g., Andrew A. Schwartz, Inclusive Crowdfunding, 2016 Utah L. Rev. 661, 672 (“Inclusivity is foundational to securities crowdfunding. The essence of the concept is the creation of an inclusive market where ordinary investors will be able to make investments that have traditionally been the exclusive purview of wealthy and connected investors.”). ↑
- See Jumpstart Our Business Startups Act, Pub. L. No. 112‑106, 126 Stat. 306 (2012). ↑
- See generally Cass Sunstein, Paradoxes of the Regulatory State, 57 U. Chi. L. Rev. 407, 408 (1990) (“The appropriate response to the paradoxes of regulation is not to return to a system of ‘laissez faire,’ but to learn from past failures.”). ↑
- See Darian M. Ibrahim, Equity Crowdfunding: A Market for Lemons?, 100 Minn. L. Rev. 561, 564 (2015); see also Michael B. Dorff, The Siren Call of Equity Crowdfunding, 39 J. Corp. L. 493 (2014). ↑
- See, e.g., Carlos Berdejó, Going Public After the JOBS Act, 76 Ohio St. L.J. 1, 10 (2015) (describing the burdens of securities law compliance in the IPO setting). ↑
- Compare Joanna Glasner, The Biggest Startup IPOs of the Past 10 Years Are All Below Their First‑Day Price, Crunchbase (May 9, 2023), https://news.crunchbase.com/public/venture-backed-us-startups-ipos [https://perma.cc/F52C-ZQY9] (sharing Uber’s IPO date of May 2019), with Adam Volle, Uber, Britannica Money, https://www.britannica.com/topic/Uber [https://perma.cc/J67Z-AFNN] (last updated Mar. 14, 2025) (sharing Uber’s founding year of 2009). ↑
- Compare Glasner, supra note 16 (stating Airbnb’s IPO date of December 2020), with About Us, Airbnb, https://news.airbnb.com/about-us [https://perma.cc/5YGE-T7SM] (stating that Airbnb was founded in 2007). ↑
- See Accredited Investor, U.S. SEC, https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor [https://perma.cc/S8CW-DSHN] (last updated Sept. 19, 2024). ↑
- Id. ↑
- Id.; see, e.g., Series 7 – General Securities Representative Exam, FINRA, https://www.finra.org/registration-exams-ce/qualification-exams/series7 [https://perma.cc/3RQ5-3S4Y] (“The Series 7 exam—the General Securities Representative Qualification Examination (GS)—assesses the competency of an entry‑level registered representative to perform their job as a general securities representative.”). ↑
- See Report on the Review of the Definition of “Accredited Investor,” U.S. SEC 58–61 (Dec. 18, 2015), https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf [https://perma.cc/TF9E-WBB9]. ↑
- Scholars have contemplated the massive changes capital raising via the internet may cause from the internet’s earliest mainstream days. See, e.g., Jill E. Fisch, Can Internet Offerings Bridge the Small Business Capital Barrier?, 2 J. Small & Emerging Bus. L. 57 (1998). Equity crowdfunding through Regulation CF represents one of the first major forays into this realm in the United States. See, e.g., C. Steven Bradford, Crowdfunding and the Federal Securities Laws, 2012 Colum. Bus. L. Rev. 1, 5 (contemplating how equity crowdfunding might become exempt from securities registration, written prior to the JOBS Act being signed into law). ↑
- Andrew A. Schwartz, Crowdfunding Securities, 88 Notre Dame L. Rev. 1457, 1461 (2013) (“In sharp contrast to the clubby nature of those traditional exemptions, the idea of crowdfunding is to gather capital from large numbers of people in the ‘crowd’ (i.e., the public), and have each individual provide only a very small amount.”). ↑
- See Chris Brummer, Disruptive Technology and Securities Regulation, 84 Fordham L. Rev. 977, 1017–18 (2015) (describing hurdles posed by the securities regulations to soliciting investment via the internet prior to Regulation CF). ↑
- Schwartz, supra note 8, at 44. ↑
- See Zachary J. Robins & Timothy M. Joyce, How to Crowdfund and Not Fall Flat on Your Face: Best Practices for Investment Crowdfunding Offerings and the Data to Prove It, 43 Mitchell Hamline L. Rev. 1059, 1064–65 (2017) (discussing how the JOBS Act provided an avenue for non‑accredited investors to participate in securities offerings). ↑
- See Gabe Alpert, Jumpstart Our Business Startups (JOBS) Act Overview, Investopedia, https://www.investopedia.com/terms/j/jumpstart-our-business-startups-act-jobs.asp [https://perma.cc/ZG7M-NEPQ] (last updated Dec. 19, 2022) (“The law allows non‑accredited investors to invest in startups through crowdfunding and ‘mini‑IPOs.’”). ↑
- See Shruti Gandhi, VC Performance Is Beating the S&P 500, VentureBeat (Apr. 2, 2017, 1:05 PM), https://venturebeat.com/entrepreneur/vc-performance-is-beating-the-sp-500 [https://perma.cc/56F5-FJRF] (sharing research from a University of Chicago economist that demonstrates a 3 to 4 percent advantage in venture capital (VC) fund returns each year from 2003 to 2013 when compared to S&P 500 returns during that same period). ↑
- See Alpert, supra note 27 (“The intended goal of the JOBS Act was to revitalize the small business sector after the financial crisis, helping entrepreneurs start businesses, grow current businesses, and putting Americans back to work.”). ↑
- Id. ↑
- See Schwartz, supra note 4, at 902 (describing the lengthy process of creating the final rule for equity crowdfunding). ↑
- Id. at 902–03. ↑
- See generally Nows, supra note 1, at 490–94 (explaining the equity crowdfunding laws in the United States in detail). ↑
- See generally Seth C. Oranburg, Bridgefunding: Crowdfunding and the Market for Entrepreneurial Finance, 25 Cornell J.L. & Pub. Pol’y 397, 397 (2015) (describing the concept of bridge‑funding in entrepreneurial finance). ↑
- Past research from both scholars and equity crowdfunding portals has shown that the typical equity crowdfunding issuer is a newly formed company with less than five employees. See Jeff Thomas, Equity Crowdfunding Portals Should Join and Enhance the Crowd by Providing Venture Formation Resources, 42 Nova L. Rev. 375, 380–81 (2018) (showing that roughly 61 percent of successful crowdfunding companies were less than five years old with a median number of four employees); Ryan Hynes, The StartEngine Index: July 2017, StartEngine, http://blog.startengine.com/july-2017-e4f497ec7048 [https://perma.cc/KU4S-LF35] (last updated Aug. 15, 2017, 1:55 PM) (showing that the average issuer is three years old and has five employees). ↑
- See generally Nows, supra note 1 (sharing examples of nontraditional issuers raising capital through Regulation CF). See also Andrew A. Schwartz, Teenage Crowdfunding, 83 U. Cin. L. Rev. 515, 527 (2014) (contemplating the unique opportunity for teenagers to raise capital for new ventures through equity crowdfunding); Andrew A. Schwartz, Rural Crowdfunding, 13 U.C. Davis Bus. L.J. 283, 292 (2013) (discussing the opportunity for financing that equity crowdfunding presents for rural entrepreneurs); Martin Edwards, The Big Crowd and the Small Enterprise: Intracorporate Disputes in the Close‑but‑Crowdfunded Firm, 122 Penn St. L. Rev. 411, 416 (2018) (sharing that permanently small businesses might also raise capital through equity crowdfunding); Joshua A. Gold, Equity Crowdfunding of Film‑Now Playing at a Computer Near You, 95 Tex. L. Rev. 1367 (2017) (discussing equity crowdfunding as a tool for film financing). ↑
- Nows, supra note 1, at 515–16. ↑
- See generally Adam Waks, Securities Law for Startups, Davis Wright Tremaine LLP, https://www.dwt.com/blogs/startup-law-blog/2020/06/securities-law-for-startups [https://perma.cc/3TH4-TPKW] (stating that Rule 506 and Rule 4(a)(2) are both commonly used exemptions in the startup context). ↑
- See Patrick McCarney, False Start: Carving a Niche for Established Small Business Participation in Regulation Crowdfunding Rules Designed for Startups, 51 Ind. L. Rev. 277, 288 (2018) (providing a table of the forms required of an issuer to maintain compliance with Regulation CF). ↑
- Id. ↑
- 17 C.F.R. § 227.201(t) (2024). ↑
- Id. ↑
- Id. ↑
- Id. ↑
- For an in‑depth discussion on the history of the SEC’s regulation of intermediaries, see Dale A. Oesterle, Intermediaries in Internet Offerings: The Future Is Here, 50 Wake Forest L. Rev. 533 (2015). ↑
- 17 C.F.R. § 227.303. ↑
- See, e.g., Invest in Clockwork, Wefunder, https://wefunder.com/clockwork/details [https://perma.cc/89DW-65W4]. ↑
- See, e.g., Invest in Humanity, Wefunder, https://wefunder.com/humanity [https://perma.cc/Q4NH-WMQC]. ↑
- See id. ↑
- See id. ↑
- 17 C.F.R § 227.201(j)(1). ↑
- See Invest in Clockwork, supra note 47. ↑
- Id. ↑
- Id. ↑
- Id. ↑
- See Invest in Humanity, supra note 48. ↑
- Id. (lacking a “Details” tab on the issuer’s Wefunder page). ↑
- Id. ↑
- Id. ↑
- See Primary Offerings, Legal Info. Inst., https://www.law.cornell.edu/wex/primary_offering [https://perma.cc/9JBX-DZC4] (“A primary offering is the issuance of new securities. A primary offering is referred to as taking place in the primary market.”). ↑
- See Secondary Offerings, Legal Info. Inst., https://www.law.cornell.edu/wex/secondary_offering [https://perma.cc/EZX8-Y6WK] (describing secondary securities offerings). ↑
- Id. ↑
- See Alpert, supra note 27. ↑
- See Brummer, supra note 24. ↑
- See, e.g., David Groshoff et al., Crowdfunding 6.0: Does the SEC’s FinTech Law Failure Reveal the Agency’s True Mission to Protect—Solely Accredited—Investors?, 9 Ohio St. Entrepreneurial Bus. L.J. 277, 278 (2015) (arguing that an early proposal for Regulation CF by the SEC did not do enough to protect non‑accredited investors). ↑
- 17 C.F.R. § 227.100 (2024). ↑
- Id. at (a)(2)(i). ↑
- Id. at (a)(2)(ii). ↑
- Id. at (a)(2)(i). ↑
- See How Much Can I Invest?, Republic, https://republic.com/help/how-much-can-i-invest-0b155a4c-a309-4127-b5a8-bdf73b09e592 [https://perma.cc/A4U6-EB5Y]. ↑
- See Regulation Crowdfunding, 80 Fed. Reg. 71388, 71496 (Nov. 16, 2015) (to be codified at 17 C.F.R. pts. 200, 227, 232, 239, 240, 242, 269, 274) (describing the extent to which issuers may rely on portals to account for individual investor compliance with Regulation CF’s dollar limits). ↑
- 17 C.F.R. § 227.100. ↑
- See Nows, supra note 1, at 519–20 (recommending the SEC allow for limited in‑person solicitation of investor capital in Regulation CF offerings). ↑
- See § 227.204. ↑
- Id. ↑
- Id. ↑
- See 2021 Kingscrowd Market Intelligence Report, Kingscrowd, https://kingscrowd.com/2021-kingscrowd-market-intelligence-report [https://perma.cc/3NWR-UUPD]. ↑
- See Brian Belley, 2022 Equity Crowdfunding Stats and Top Platforms, Crowdwise (Jan. 16, 2023), https://crowdwise.org/funding-portals/2022-equity-crowdfunding-stats-and-top-platforms [https://perma.cc/DW76-GJHH]; see also Brian Belley, Reg CF 2023 – Top Platforms and Year in Review, Kingscrowd (Jan. 7, 2024) [hereinafter Belley, Reg CF 2023], https://kingscrowd.com/reg-cf-2023-top-platforms-and-year-in-review [https://perma.cc/KL7G-SA26] (“In 2023, Reg CF companies raised $420 million total—down 0.7% from $423 million in 2022.”). ↑
- See Charting a Course: Building a Winning VC Fund Strategy [Part II], Seraf, https://seraf-investor.com/compass/article/charting-course-building-winning-vc-fund-strategy-part-ii [https://perma.cc/C5QC-RBP8] (describing the typical 10‑year lifecycle of a venture fund). ↑
- See Brian Belley, What Financial Returns to Expect from Equity Crowdfunding, Kingscrowd (Mar. 10, 2020), https://kingscrowd.com/what-financial-returns-to-expect-from-equity-crowdfunding [https://perma.cc/6K8W-MBEZ]. ↑
- See generally David Nows, Equity Crowdfunding and the Lead Investor, 24 N.C. J.L. & Tech. 33 (2023) (comparing lead investors in the angel investing and venture capital contexts to lead investors in equity crowdfunding). While angel investors and venture capitalists are able to negotiate deal terms with issuers, including the valuation of the company, equity crowdfunding investors cannot. Id. ↑
- Id. ↑
- See, e.g., Joan MacLeod Heminway, Selling Crowdfunded Equity: A New Frontier, 70 Okla. L. Rev. 189, 201–02 (2017) (discussing the one‑year rule of transfer restrictions on crowdfunded securities). ↑
- See Nows, supra note 1, at 496 (describing an article that provides data on the low probability of an exit event in crowdfunded ventures in the United Kingdom as compared to new ventures funded by venture capitalists); see also Waverly Deutsch, Equity Crowdfunding Is Inflating a Bubble, Chi. Booth Rev. (Nov. 20, 2018), https://www.chicagobooth.edu/review/equity-crowdfunding-inflating-bubble [https://perma.cc/6GWJ-6AW3]. ↑
- See Ibrahim, supra note 14. ↑
- Id. at 566. ↑
- Id. ↑
- See generally Allen C. Page, Private Inequity: Reform Rule 506 to Safely Accommodate Investment by Nonaccredited Investors, 14 Wm. & Mary Bus. L. Rev. 63 (2022). ↑
- See generally Nows, supra note 1, at 482–87. ↑
- See C. Steven Bradford, Online Arbitration as a Remedy for Crowdfunding Fraud, 45 Fla. St. U. L. Rev. 1165 (2018); cf. Thomas G. James, Far from the Maddening Crowd: Does the Jobs Act Provide Meaningful Redress to Small Investors for Securities Fraud in Connection with Crowdfunding Offerings?, 54 B.C. L. Rev. 1767, 1767 (2013) (“Congress should carve out an exception to the PSLRA for class action lawsuits alleging fraud in connection with crowdfunding offerings.”). ↑
- See Darian M. Ibrahim, Crowdfunding Without the Crowd, 95 N.C. L. Rev. 1481 (2017). ↑
- See Ronald J. Gilson & David M. Schizer, Understanding Venture Capital Structure: A Tax Explanation for Convertible Preferred Stock, 116 Harv. L. Rev. 874, 879 n.14 (2003). ↑
- See Andrew A. Schwartz, The Digital Shareholder, 100 Minn. L. Rev. 609, 631 (2015) (citing Gilson & Schizer, supra note 92). ↑
- See Ronald J. Gilson, Engineering a Venture Capital Market: Lessons from the American Experience, 55 Stan. L. Rev. 1067, 1076 (2003) (describing the extreme form of typical financial contract problems in the venture capital space). ↑
- See Schwartz, supra note 93 (citing Gilson, supra note 94) (discussing information asymmetries in the context of startup investing); see also Robert P. Bartlett, III, Venture Capital, Agency Costs, and the False Dichotomy of the Corporation, 54 UCLA L. Rev. 37, 41 n.9 (2006). ↑
- See Schwartz, supra note 93, at 632 (emphasizing that information asymmetries are especially likely between new ventures and investors in equity crowdfunding). ↑
- See Darian M. Ibrahim, Underwriting Crowdfunding, 25 Stan. J.L. Bus. & Fin. 289, 300 (2020) (explaining the role of disclosure compelled by the securities regulations in mitigating information asymmetries between investors and issuers). ↑
- See generally Brian Belley, Part 4 – Deal Types in Equity Crowdfunding, Crowdwise (Oct. 15, 2018), https://crowdwise.org/crowd-investing-101/part-4-deal-types-equity-crowdfunding [https://perma.cc/WLK6-Z99L] (discussing the types of securities commonly offered by issuers in Regulation CF offerings). ↑
- See id. ↑
- Id. ↑
- See Patricia H. Lee, Crowdfunding Capital in the Age of Blockchain‑Based Tokens, 92 St. John’s L. Rev. 833, 869 (2018) (discussing the lack of clarity with respect to digital tokens or coins and their status as a security). ↑
- See Seth C. Oranburg, A Place of Their Own: Crowds in the New Market for Equity Crowdfunding, 100 Minn. L. Rev.: Headnotes 147, 150 (2016) (“The Digital Shareholder probably cannot mitigate the trio of problems in the traditional ways. Given a legal limit of $10,000 per investor per year, it is doubtful that the digital shareholder will have the time, inclination, or ability to join two or three corporate boards, manage a multi‑staged private‑investment portfolio, and get technical expertise in the latest app‑coding languages.”). ↑
- See Jack Wroldsen, Crowdfunding Investment Contracts, 11 Va. L. & Bus. Rev. 543, 579 (2017) (describing the role of discussion boards on equity crowdfunding portals in giving shareholders a voice). ↑
- See generally Darian M. Ibrahim, Crowdfunding Signals, 53 Ga. L. Rev. 197, 206–07 (2018) (describing the significant information asymmetry present in entrepreneurial finance). ↑
- See Ibrahim, supra note 97, at 299–300 (describing the need for mandatory disclosures in the initial public offering and equity crowdfunding contexts). ↑
- See, e.g., Mercer Bullard, Crowdfunding’s Culture of Noncompliance: An Empirical Analysis, 24 Lewis & Clark L. Rev. 899, 917 (2020) (explaining common ways in which equity crowdfunding issuers do not comply with disclosure requirements). ↑
- See id. at 921 (describing the standards portals are held to in ensuring issuer compliance with Regulation CF and concluding that there is an overall failure to monitor). ↑
- See Darian M. Ibrahim, A Tokenized Future: Regulatory Lessons from Crowdfunding and Standard Form Contracts, 74 Hastings L.J. 45, 64 (2022) (citing Omri Ben‑Shahar & Carl E. Schneider, More Than You Wanted To Know: The Failure of Mandated Disclosure (2014)) (noting why equity crowdfunding disclosures are generally ineffective at informing investors). ↑
- See, e.g., Arthur McMahon, III, It Takes a Village to Fund a Start‑Up: How an Electronic Community for Early‑Stage Investments Can Bring Democracy Back to Equity Crowdfunding, 84 U. Cin. L. Rev. 1269, 1323–24 (2016). ↑
- Id. ↑
- See Pradeep K. Sai et al., Analysing Performance of Company Through Annual Reports Using Text Analytics, Int’l Conf. on Digitization, Nov. 2019, at 21. ↑
- Id. ↑
- See Elementree Inc., Offering Statement (Form C) (Dec. 4, 2023). ↑
- Id. ↑
- See, e.g., Gerlinde Berger‑Walliser et al., Promoting Business Success Through Contract Visualization, 17 J.L., Bus. & Ethics 55, 57 (2011) (discussing how visual elements can be used to improve non‑lawyer understanding of commercial contracts); see also Thomas Barton et al., Visualization: Seeing Contracts for What They Are, and What They Could Become, 19 J.L., Bus. & Ethics 47 (2013); Gerlinde Berger‑Walliser et al., From Visualization to Legal Design: A Collaborative and Creative Process, 54 Am. Bus. L.J. 347 (2017). ↑
- Compare Invest in Clockwork, supra note 47, with Elementree Inc., supra note 113. ↑
- See Invest in Clockwork, supra note 47. ↑
- See Priyanka Meharia, Use of Visualization in Digital Financial Reporting: The Effect of Sparkline 7 (July 3, 2012) (Ph.D. dissertation, University of Kentucky) (on file with University of Kentucky Libraries). ↑
- Id. at 7–9. ↑
- See Hong Zou & Sambhavi Chandrashekar, ChartMaster: A Tool for Promoting Financial Inclusion of Novice Investors, in Universal Access in Human‑Computer Interaction: Users and Context Diversity 171, 171 (M. Antona & C. Stephanidis eds., 2016). ↑
- See Jeremy Liles, Enhancing SEC Disclosure with Interactive Data, 91 Denv. U. L. Rev. Online 121, 125–27 (2014) (discussing XML and how the SEC has implemented interactive data requirements as of 2014). ↑
- See Regulation Crowdfunding, 78 Fed. Reg. 66428, 66438 (Nov. 5, 2013) (17 C.F.R. pt. 220, 227, 232, 239, 240, 249) (“[W]e are proposing to require issuers to file the disclosures with the Commission on Form C. As proposed, Form C would be filed in the standard format of eXtensible Markup Language (XML). An XML‑based fillable form would enable issuers to provide information in a convenient medium without requiring the issuer to purchase or maintain additional software or technology.”). ↑
- See SEC Staff Issues Guidance on Filing Form C on EDGAR, Westlaw: Prac. L. and Corp. Secs. (Mar. 18, 2021), https://1.next.westlaw.com/Document/I043b791787f311ebbea4f0dc9fb69570/View/FullText.html?transitionType=Default&contextData=(sc.Default) [https://perma.cc/H5CA-XXPW]. “On May 14, 2021, the Staff updated its guidance to announce that, effective May 10, 2021, the changes to the XML‑based fillable form have been implemented. Issuers are now able and required to provide accurate offering amounts in the XML‑based fillable form and in the offering document attached as an exhibit to the Form C. Issuers that relied on the SEC’s earlier guidance must also update their cover page to provide the actual offering amounts if filing an amendment to Form C after May 10, 2021.” Id. ↑
- See Avijeet Biswal, Power BI vs Tableau: Which Is Better Data Visualization Tool, SimpliLearn, https://www.simplilearn.com/tutorials/power-bi-tutorial/power-bi-vs-tableau [https://perma.cc/XTS7-T5TW] (last updated Jan. 15, 2025) (describing Power BI and Tableau as software tools). ↑
- See, e.g., Go from Data to Insight to Action with Microsoft Power BI Desktop, Microsoft, https://powerbi.microsoft.com/en-us/desktop [https://perma.cc/B8TR-RSCH] (providing a link to download the free version of Power BI). ↑
- See Sean Ross, How Morningstar Rates and Ranks Mutual Funds, Investopedia, https://www.investopedia.com/articles/investing/102115/how-morningstar-rates-and-ranks-mutual-funds.asp [https://perma.cc/BXW4-HPH8] (last updated July 24, 2023). ↑
- Id. ↑
- Morningstar Rating (Star Rating) – Funds, Morningstar Off. (2023), https://awgmain.morningstar.com/webhelp/glossary_definitions/mutual_fund/mfglossary_MorningstarRating.html [https://perma.cc/G3EX-RLE3]. ↑
- Id. ↑
- See Kirsten Grind et al., The Morningstar Mirage, Wall Street J. (Oct. 25, 2017, 11:51 AM), https://www.wsj.com/articles/the-morningstar-mirage-1508946687 [https://perma.cc/58ZL-NPEM] (“Millions of people trust Morningstar Inc. to help them decide where to put their money. From pension funds to endowments to financial advisers to individuals, investors rely on Morningstar’s star ratings to help divide $16 trillion among America’s mutual funds, in much the way shoppers use Amazon’s ratings to pick products.”). ↑
- See Christopher B. Phillips & Francis M. Kinniry, Jr., Mutual Fund Ratings and Future Performance, Vanguard (June 2010), https://www.stat.berkeley.edu/~aldous/157/Papers/mutual_funds.pdf [https://perma.cc/JXH4-KNGR]. “[W]e conclude that investors should expect an average rating for index funds when relative quantitative metrics are used. This is because the natural distribution of the actively managed fund universe around a benchmark dictates that an appropriately constructed and managed index fund should fall somewhere near the center of that distribution. We also find that a given rating offers little information about expected future relative performance; in fact, our analysis reveals that higher‑rated funds are no more likely to outperform a given benchmark than lower‑rated funds, and that the value of indexing stems in large part from low operating costs and the zero‑sum game.” Id. See also Grind et al., supra note 130. “The Wall Street Journal tested Morningstar’s ratings by examining the performance of thousands of funds dating back to 2003, shortly after the company began its current system. Funds that earned high star ratings attracted the vast majority of investor dollars. Most of them failed to perform. Of funds awarded a coveted five‑star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock‑bottom one‑star rating.” Id. ↑
- See Grind et al., supra note 130. ↑
- Id. ↑
- Id. ↑
- Id. ↑
- Id. ↑
- See Schwab Equity Ratings, Charles Schwab, https://www.schwab.com/resource/schwab-equity-ratings [https://perma.cc/27PH-JMLG]. ↑
- Id. ↑
- Compare id. (providing a forward-looking rating service) with Ross, supra note 126 (providing a backward-looking rating service.) ↑
- See Schwab Equity Ratings, supra note 137, at 3. ↑
- Id. ↑
- Id. ↑
- Id. ↑
- Id. at 2–3. ↑
- Id. ↑
- Id. ↑
- Id. ↑
- See Kingscrowd Startup Rating Methodology, Kingscrowd, https://kingscrowd.com/kingscrowd-startup-rating-methodology [https://perma.cc/6YK9-AML9] (last updated Oct. 17, 2022). ↑
- Id. ↑
- Id. ↑
- Kingscrowd addresses this criticism on their website, but in the Author’s opinion, provides a “strawman” argument in its effort to dismiss the critique. “We understand that this approach raises its own set of questions. A major point we have considered is that if all available companies are bad, then some will still receive high scores because they are marginally better than their peers. That can be true. However, we think it is very rare for all raising companies to be low‑quality. We believe that the advantages of this approach outweigh the disadvantages.” Id. ↑
- Id. ↑
- Id. “For every company we rate, we collect more than 350 unstructured data points. We draw from a startup’s raise page, pitch decks, financials, and performance metrics. We also pull information from companies’ websites and blogs, news and reviews written about the companies or their products/services, and other public data sources. In addition, we conduct our own standardized market sizing to get a better understanding of a startup’s potential.” Id. ↑
- Id. ↑
- Id. ↑
- Id. (stating that “we consider the company’s current phase. Is it pre‑launch, pre‑revenue, pre‑profit, or profitable? We also consider total annual revenue, revenue growth rates, funding raised in prior rounds, monthly burn rates relative to total capital, total assets relative to total liabilities, and other financial metrics.”). ↑
- Id. For example, Kingscrowd evaluates an issuer’s team by “tak[ing] a deep look at the founders and other key team members. We consider years of relevant industry experience for the founders and the size of their network. We check to see if they have previous successful exits. The founders’ level of education, where that education was attained, and level of managerial experience are also taken into account. To get an idea of team cohesion, we look at whether the founders have worked together previously and whether they have complementary skill sets. Beyond the founders, we consider the number of relevant advisors and notable investors. Lastly, we examine the diversity of the team as a whole and the quality of key executives in the team.” Id. ↑
- See Level Up Your Startup Investing, Kingscrowd, https://kingscrowd.com/subscribe [https://perma.cc/X24D-TJGA] (providing Kingscrowd’s pricing for its services). ↑
- Id. ↑
- Deal Reports can be found on Kingscrowd by selecting a company under the Deal Explorer feature and clicking the “Buy Deal Report” button. See, e.g., Neurosity, Kingscrowd, https://kingscrowd.com/neurosity-on-wefunder-2023 [https://perma.cc/3KM4-WKDZ]. ↑
- See The Industry’s Most Advanced Investment Crowdfunding Screener, Hubtas, https://hubtas.com/offerings [https://perma.cc/83ML-YA7J]. ↑
- See Advanced Search, Kingscrowd, https://kingscrowd.com/companies/search [https://perma.cc/B7J5-8BFX]. ↑
- Hubtas, supra note 161. ↑
- See Build Your Own Venture Algorithm, Hubtas, https://hubtas.com/customquant [https://perma.cc/BT7X-5JV7]. ↑
- Id. ↑
- See (Beta) AI Generated Startup Investment Reports, Hubtas, https://hubtas.com/hubtas-gpt [https://perma.cc/7DXM-N73P]. ↑
- See Join Hubtas, Hubtas, https://hubtas.com/pricing [https://perma.cc/8A5R-HN84]. ↑
- See, e.g., Terms and Conditions, Morningstar, https://www.morningstar.com/company/terms-and-conditions [https://perma.cc/4VAY-XLK2] (“This website contains information, including, without limitation, statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific securities or investment advice of any kind do not constitute an offer to buy or sell securities and are not intended to constitute investment advice of any kind. The past performance of an investment or investment strategy cannot guarantee its future performance.”). ↑
- See Terms of Use, Kingscrowd, https://kingscrowd.com/terms-of-use [https://perma.cc/9FV2-PC3Z]. ↑
- Id. ↑
- Id. ↑
- See Terms of Sale, Kingscrowd, https://kingscrowd.com/terms-of-sale [https://perma.cc/DY29-2ZHP]. ↑
- Id. ↑
- Id. ↑
- See Terms of Use, Hubtas, https://hubtas.com/terms [https://perma.cc/5JLC-B49X]. ↑
- See Kingscrowd Startup Rating Methodology, supra note 148; see also Hubtas, supra note 9. ↑
- Using the rule outlined in 17 C.F.R. § 227.100, an investor may invest 5 percent of the greater of her net worth or annual income during any twelve‑month period if her net worth or annual income is below $124,000. ↑
- See Level Up Your Startup Investing, supra note 158; see also Join Hubtas, supra note 167. ↑
- An example of how equity crowdfunding portals market themselves to suit issuer interests can be seen on Wefunder’s website. Let Your Community Invest, Wefunder, https://wefunder.com/raise [https://perma.cc/9UDS-3XHW]. ↑
- Id. (“We charge a flat fee of 7.9% of funds successfully raised and an annual fee of 0.5%, capped at $1,000 each year for funds successfully raised. Pay nothing until you successfully raise money.”). ↑
- Id. ↑
- For example, Wefunder provides investors with a frequently asked questions section, but the content does little to help educate investors on the key metrics and information they should consider prior to investing in an issuer. See Investor FAQ, Wefunder, https://help.wefunder.com/#/investor/getting-started-for-investors [https://perma.cc/BRT9-7BDR]. ↑
- This concept is clearly demonstrated by the network effects experienced by the largest U.S.‑based crowdfunding portals. A few key portals dominate the market, in large part, due to the fact that a significant number of listings end up on those portals. See Belley, Reg CF 2023, supra note 78 (stating that “[s]imilar to past years, the majority of investment volume came from just a few of the platforms” and providing data to support those claims). ↑
- See generally Andrew A. Schwartz, Investment Crowdfunding 10 (2023) (advocating for a system of private ordering for equity crowdfunding). ↑
- See Kingscrowd Startup Rating Methodology, supra note 148. “Another result of this approach is that the ratings of one company can vary from week to week. Every week, we add new companies and remove those who closed their funding rounds. These updates can change the ratings of those startups that are still active.” Id. ↑
- Id. (“We compare all startups that are actively raising capital to each other. We think this is the most fair comparison in an ever‑evolving world of innovation.”). ↑
- See The Industry’s Most Advanced Investment Crowdfunding Screener, supra note 161 (sharing metrics like total score, valuation score, financial score, team score, and risk score available with the premium, paid version of Hubtas). ↑
- See, e.g., Morningstar Ratings 101: What You Need to Know, supra note 10. ↑
- See Adam Hayes, Mutual Funds: Different Types and How They Are Priced, Investopedia (Dec. 17, 2023), https://www.investopedia.com/terms/m/mutualfund.asp [https://perma.cc/SJ9A-N5MJ]. ↑
- See Pacome Breton, Harnessing the Power of Long‑Term Investing, Nutmeg (Aug. 18, 2022), https://www.nutmeg.com/nutmegonomics/increasing-your-chances-of-positive-portfolio-returns-the-facts-about-long-term-investing [https://perma.cc/ZN7R-7HWR] (describing why a long‑term investment strategy of buying and holding investments has a higher likelihood of success). ↑
- See, e.g., Nows, supra note 1, at 497–98 (“Small businesses of a local nature make for a large portion of successful crowdfunding campaigns.”). ↑
- See Navisyo: Redefining Travel, Lodging and Realty, Wefunder, https://wefunder.com/navisyo/details [https://perma.cc/6G2X-BVF2]. ↑
- Navisyo Inc., Offering Statement (Form C) (Dec. 20, 2021). ↑
- See id. ↑
- See, e.g., Freebird Rides: Cash and Rewards for Using Uber and Lyft, Wefunder, https://wefunder.com/freebirdrides/details [https://perma.cc/7L2M-KGGD] (sharing the issuer’s revenue, net loss, short‑term debt, amount of money raised in the current year, and cash on hand, alongside graphics). ↑
- Id. (sharing financial information directly from Form C via the issuer’s portal page). ↑
- See The Industry’s Most Advanced Investment Crowdfunding Screener, supra note 161 (providing a sorting and filtering tool for investors seeking to invest in issuers through Regulation CF). ↑
- See Hubtas FAQ, Hubtas, https://hubtas.notion.site/Hubtas-FAQ-5ffd40cc7d25449fb7876f55aa1d49ff [https://perma.cc/9U5M-2AAT] (stating “[w]e break down the extensive SEC documents into an easier‑to‑understand, visually appealing format,” and “[y]ou will find companies on Hubtas within 24 hours of their launch. All information is of the date launched, unless the company has made subsequent Form C/A filings to report changes.”). ↑
- Chris Lustrino, The Ultimate Guide to Financial Securities in Equity Crowdfunding, Kingscrowd (Mar. 31, 2020), https://kingscrowd.com/the-ultimate-guide-to-security-in-the-equity-crowdfunding-realm [https://perma.cc/6UPC-MD58] (“The primary types of crowdfunding securities in equity crowdfunding include: Common stock; Preferred stock; SAFEs [and] Convertible notes (sometimes called ‘Crowd notes’).”). ↑
- See, e.g., Ready to Get Your (Angel) Wings?, Wefunder, https://wefunder.com/school [https://perma.cc/LKX7-SXM4] (providing an example of a portal’s investor having a separate page on the website to provide point‑of‑sale investor educational classes). ↑
- See, e.g., Claire Boyte‑White, The Complete Guide to Choosing an Online Stockbroker, Investopedia (June 28, 2021), https://www.investopedia.com/investing/complete-guide-choosing-online-stock-broker [https://perma.cc/Z48C-RAT8]. ↑
- For example, the U. S. portal Wefunder provides personalized guidance and attention to issuers listing an offering on its site, while providing investors with little more than a set of informational videos to learn the ins‑and‑outs of startup investing. Compare Let Your Community Invest, supra note 179, with Ready To Get Your (Angel) Wings?, supra note 200. ↑
- See Nows, supra note 81, at 53 (stating that lead investors in equity crowdfunding campaigns do not negotiate the terms of the investment with the issuer on behalf of all investors). ↑
- Id. ↑
- See Schwartz, supra note 184, at 9–10 (“The countries that adopted the liberal model, that is, the United Kingdom and New Zealand, have larger and more impactful investment crowdfunding markets than the United States and the others that followed the standard model—and without higher levels of failure and fraud.”). ↑
- Id. at 73. “In the United States, Australia, and Canada, the law requires crowdfunding entrepreneurs to provide certain mandatory disclosures. In New Zealand and the United Kingdom, by contrast, the law does not impose mandatory disclosure and expects that private ordering will generate voluntary disclosure,” and “[i]n New Zealand and the United Kingdom, companies always provide financial statements as part of the offering—but they are rarely in the formal GAAP format. More often, companies post an ‘information memorandum’ of their own design, akin to what they would (and often do) show to an angel investor or VC.” Id. ↑
- Id. at 73–74. ↑
- Id. ↑
- See Mevo, Snowball Effect, https://www.snowballeffect.co.nz/offers/show/mevo-2023-i601p/financial [https://perma.cc/J79X-KSKD]. ↑
- See Schwartz, supra note 184, at 73. ↑
- Id. at 63 (stating that “platforms have strong economic incentives that push them to serve as responsible gatekeepers”). ↑
- Id. ↑
- Id. (stating that “many (but not all) of the leading investment crowdfunding platforms take a financial interest in the companies they list, sometimes called a ‘carry’”); see also Josephine Koh, Carried Interest, Carta (Apr. 5, 2024), https://carta.com/learn/private-funds/management/carried-interest [https://perma.cc/L323-4MDN]. ↑
- See Schwartz, supra note 184, at 63 (comparing the carry charged to issuers on various equity crowdfunding platforms globally). ↑
- Id. ↑
- Id. ↑
- A similar concept comes from the SEC’s Regulation Best Interest, which applies to broker‑dealers and associated persons who “mak[e] a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer.” See Regulation Best Interest, U.S. Sec, https://www.sec.gov/info/smallbus/secg/regulation-best-interest [https://perma.cc/X2EN-2JDF] (last updated Sept. 9, 2019). ↑
- Id. ↑
- “Burn rate” is a term used in startup culture to describe the amount of capital a company loses each month or year. Given that startups commonly “light money on fire” in the pursuit of growth, this term is fitting to the investors who provide the capital. Will Kenton, Burn Rate: What Is It, 2 Types, Formula, and Examples, Investopedia, https://www.investopedia.com/terms/b/burnrate.asp [https://perma.cc/9ZG5-47NQ] (last updated June 29, 2024). ↑
- Wefunder already provides some financial metrics in a similar graphic format and can be used as a best practice example. See, e.g., Invest in Clockwork, supra note 47. ↑
- See Schwartz, supra note 184, at 63. ↑
- Id. ↑
- See supra Section IV.A. ↑
- See Schwartz, supra note 184, at 63. ↑
- Id. ↑
- Id. ↑
- This is a typical strategy used by angel investors and venture capitalist, and it can yield higher returns than a diversified portfolio of publicly traded stocks. See, e.g., Gandhi, supra note 28. ↑
- See Let Your Community Invest, supra note 179 (stating that Wefunder assists issuers with “grunt work” like SEC filings, taxes, investor communications, and compliance checks in exchange for “a flat fee of 7.9% of funds successfully raised and an annual fee of 0.5%, capped at $1,000 each year for funds successfully raised”). ↑
- See Schwartz, supra note 184, at 63. ↑
- Id. ↑
- See Caleb Naysmith, When Will I See a Return on My StartEngine and Wefunder Investments?, Democratizing Fin. (Aug. 26, 2023), https://www.democratizing.finance/post/when-will-i-see-a-return-on-my-startengine-and-wefunder-investments [https://perma.cc/N8FZ-DXWU] (describing how the timeline of returns varies based on the maturity of the company). ↑
- See Schwartz, supra note 184, at 64. “The incentive to act as a strict gatekeeper may only work over such a long time frame as to be ineffective. A crowdfunding platform that takes a lax approach to its gatekeeper role and lets practically anybody list on its site might not be discovered until years have passed and most of the companies it listed have gone down the tubes. By that time, the platform will have collected years’ worth of fees (which are rather rich) while putting in only minimal resources and effort. At that point, its operators may not care that their platform will henceforth be a pariah—they are too busy sailing on their yachts.” Id. ↑
- See Global Entrepreneurship Index 2018, Glob. Entrepreneurship & Dev. Inst., http://thegedi.org/global-entrepreneurship-and-development-index [https://perma.cc/2CBK-XJVF] (ranking the United States first out of 137 countries in its Global Entrepreneurship Index); see also Alexandra Dunk, Entrepreneurship: An American Obsession?, Babson Thought & Action (Jan. 9, 2019), https://entrepreneurship.babson.edu/2017-global-entrepreneurship-monitor-us-report [https://perma.cc/6JNC-JDQ2] (discussing the Global Entrepreneurship Monitor report led by Babson College and the London Business School). ↑
- See generally Schwartz, supra note 184, at 143–46. ↑
- Id. at 160, 164 (discussing New Zealand and stating that “[w]hen the FMCA passed in 2013, angel investors were investing just NZ$30 million (approximately $20 million) per year in all New Zealand companies combined, and VCs not much more,” and “[i]n the first four years of crowdfunding in the United States (2016‑2019), New Zealand companies raised seven times more money did their American counterparts, on a per capita basis”). ↑
- See Belley, Reg CF 2023, supra note 78; see also Craig McCann et al., Regulation D: Issuers, Investors and Intermediaries, U.S. SEC Investor Advisory Comm. (Sept. 21, 2023), https://www.sec.gov/files/craig-mccann-presentation-092123.pdf [https://perma.cc/VC5H-GXV6] (stating that at least $4.4 trillion was raised between 2021 and 2022 through Regulation D offerings). ↑
- See generally Oranburg, supra note 34 (discussing the idea of bridgefunding for new ventures). ↑
- See How Do SPVs Work?, Wefunder, https://help.wefunder.com/spvs-custodians-founders/how-will-reg-cf-spvs-work [https://perma.cc/NKH4-2GCJ] (“An SPV, or ‘special purpose vehicle,’ is an entity that is set up for the sole purpose of investing in your company.”). ↑
- The phrase “enduringly profitable” comes from the search fund context, where acquirers look for small businesses to purchase and invest in which have the potential to have profits that will endure into the future. See Richard S. Ruback & Royce Yudkoff, HBR Guide To Buying A Small Business: Think Big, Buy Small, Own Your Own Company 79 (2017) (stating that searchers “should look for what may seem to be a dull business: one that has the same customers from year to year and is growing slowly—a business that is what we call enduringly profitable”); see also David Nows, Acquisition Entrepreneurship: One Solution to the Looming Business Succession Crisis, 97 Ind. L.J. Supp. 1, 12 (2021) (“An enduringly profitable business can offer a safer yet profitable class of investment to angel investors.”). ↑
- See Nows, supra note 1, at 497–98 (stating that “one can quickly browse a set of Equity Crowdfunding portal websites and see that small businesses of a local nature make for a large portion of successful crowdfunding campaigns”). ↑
- For a discussion on the entity type a social venture may choose to use in these instances, the benefit corporation, see David Nows & Jeff Thomas, Delaware’s Public Benefit Corporation: The Traditional VC‑Backed Company’s Mission Driven Twin, 88 UMKC L. Rev. 873 (2020). One reason for selecting the benefit corporation over its main alternative, a nonprofit corporation, is the challenges in raising capital in the nonprofit setting. See David Nows, Modernizing Charitable Fundraising Regulation, 14 Drexel L. Rev. 69 (2022). ↑
- See Nows, supra note 1, at 497–99. ↑
- See generally Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (2012) (describing the JOBS Act). See also Regulation Crowdfunding, 80 Fed. Reg. 71388–401 (Section I.A.) (Nov. 16, 2015) (to be codified at 17 C.F.R. pts. 200, 227, 232, 239, 240, 242, 269, 274) (describing the SEC’s final rule for equity crowdfunding). ↑
- 126 Stat. 306; Regulation Crowdfunding, 80 Fed. Reg. at 71388–401. For a discussion on an alternate system of funding new ventures that are not professional investor‑ready, see generally David Nows, Funding Futurist Ideas, 102 Neb. L. Rev. 849 (2024). ↑
- For example, at the time of this writing, the New Zealand equity crowdfunding website Snowball Effect was hosting only one active offering, Mevo. Even when controlling for population size, this is a far smaller proportion of offerings than seen in the United States on top equity crowdfunding portals. See Mevo, supra note 209. ↑
- See Dunk, supra note 233; see also Marshall Hargrave, Top 5 Most Successful American Entrepreneurs, Investopedia (Nov. 5, 2022), https://www.investopedia.com/articles/personal-finance/092315/top-5-most-successful-american-entrepreneurs.asp [https://perma.cc/C9MJ-B3RT] (sharing five examples of excellence in entrepreneurship in the United States); Kyle Jensen et al., Entrepreneurs and the Truth, Harv. Bus. Rev. (July–Aug. 2021), https://hbr.org/2021/07/entrepreneurs-and-the-truth [https://perma.cc/LD86-9ERG] (“Chicanery is common in the start-up world: With so much at stake, founders are apt to exaggerate, obfuscate, and otherwise stretch the truth when courting investors and other important stakeholders.”). ↑
- See Belley, Reg CF 2023, supra note 78. ↑
- See Schwartz, supra note 184, at 63. ↑
- Id. at 62 (“The platform may demand information from the companies that want to participate and conduct its own research and analysis as well. All of this redounds all to the benefit of investors, as it reduces both uncertainty and information asymmetry.”). ↑
- See The Industry’s Most Advanced Investment Crowdfunding Screener, supra note 161. ↑
- See Schwab Equity Ratings, supra note 137. ↑
- See Let Your Community Invest, supra note 179 (regarding Wefunder’s current use of graphics). ↑
- See SEC Staff Issues Guidance on Filing Form C on EDGAR, supra note 123; see also Biswal, supra note 124; Go from Data to Insight to Action with Microsoft Power BI Desktop, supra note 125. ↑
- See No Action Letters, U.S. SEC, https://www.investor.gov/introduction-investing/investing-basics/glossary/no-action-letters [https://perma.cc/V5NM-TQUF] (“An individual or entity who is not certain whether a particular product, service, or action would constitute a violation of the federal securities law may request a ‘no‑action’ letter from the SEC staff. Most no‑action letters describe the request, analyze the particular facts and circumstances involved, discuss applicable laws and rules, and, if the staff grants the request for no action, concludes that the SEC staff would not recommend that the Commission take enforcement action against the requester based on the facts and representations described in the individual’s or entity’s request.”). ↑
- See, e.g., Personal AI, Republic, https://republic.com/personal-ai [https://perma.cc/UMG6-B8AC] (displaying issuer financial data on a sidebar and only through a link to the issuer’s Form C because no financial data is directly available on the Republic offering page). ↑
- Id. ↑
- See, e.g., Get a Piece of Moocho: Where Every Payment Is Rewarding, StartEngine, https://www.startengine.com/offering/moocho [https://perma.cc/TH9D-7F56] (showing an offering page providing information on the investment opportunity itself, as well as links and drop-down menus that provide issuer financial data). ↑
- Id. ↑
- Id. ↑
- See, e.g., Invest in Stack: The First Multiplayer Internet Browser Built for Collaborations, Wefunder, https://wefunder.com/stackbrowser/details [https://perma.cc/5CHG-VSN7] (showing an offering page providing information in a more visual format than other pages discussed in this Article). ↑
- Id. ↑
- Id. ↑
- See supra Section I.C. ↑
- See Robins & Joyce, supra note 26. ↑
- See, e.g., Seth C. Oranburg, Democratizing Startups, 68 Rutgers Univ. L. Rev. 1013, 1013 (2016) (encouraging Congress and the SEC to take the ideas behind the JOBS Act further by “propos[ing] ‘Rule 144B,’ a regulatory provision that could be enacted without an act of Congress, to permit transparent web‑based venture exchanges with fraud‑prevention intermediaries termed ‘independent analysts’”). ↑