13crowdfunding platforms, promoters are usually given the chance to pitch their ideasto potential funders, who then choose which projects to support.
In exchange for acontribution, most current crowdfunding sites only allow promoters to rewardfunders with nominal perks or “thank-you” gifts.
Because the contributions areeffectively donations, this is called “patronage crowdfunding.”
If promoters reward funders with something more than a thank-you gift,such as an equity share in the project itself, it is “investment crowdfunding.”
Theprincipal reason most promoters do not reward their online patrons with equity shares, or any other security, is the danger of getting entangled in complicatedsecurities laws.
While the United States is “[b]y far the biggest and mostsophisticated country supporting [various forms of financial investment] . . . [f]ederallaw seems to rule out . . . online marketing for investment in return for debt orequity.”
For instance, it is illegal in the United States to offer or sell a “security” without either complying with arduous registration requirements or wading throughthe difficult process of obtaining an exemption.
Promoters legitimately worry thatany investment opportunity in their project could be a security known as an
nor do they have the potential for a large enough exit. And second, there are too few venturecapitalists versus the masses of entrepreneurs who need money.”).
Raising funds? Many turn to the Web for help
, Sept. 21, 2010,at B1,
2010 WLNR 18760546.
note 1, at 376 (“In return, financial contributors typically receive ‘patronage perks’such as use of their name in the film credits or album liner notes, advanced autographed copies of the work, or backstage access at a performer’s show.”).
note 1, at 376.
This Article adopts “investment crowdfunding,” as opposed to “equity crowdfunding,” becausefunders might get a debt-based security, or funders might not get actual equity but merely aninvestment contract—e.g., Grow VC, discussed later, gives subscribers a cut of the profits, but notequity
note 1, at 376-77; C. Steven Bradford,
Crowdfunding and the Federal Securities Laws
. (forthcoming 2011) (manuscript at 4-5),
Fellow Crowdfunders – What’s Holding You Up?
(May 30, 2010),http://www.crowdfundingcentral.com/blog_holdup.
15 U.S.C. §§ 77c, 77e(c), 77f (2006).