Crowdfunding

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OK.  I count 17 Form C filings (not including a few amended filings, two of which are noted below) on “Day 1” of U.S securities crowdfunding.  Not a bad showing for the first day out, in my view.

First in line? Bloomery Investment Holdings, LLC with an offering of LLC interests on StartEngine Capital LLC.  The firm filed its Form C a bit after 6:30 AM.   Early risers!  Eager beavers!  (Maybe too eager, since an amendment was filed less than two hours later–apparently because the attendant Form C .pdf was rejected in the initial filing.)  The firm’s subsidiary is a moonshine-based liqueur producer.  At this writing, $11,700 of the target threshold funding of $300,000 (1000 units at $300 per unit) has been committed–$288,300 to go!  ($600 came in while I was typing this post.)  And it looks like the base of operations is in West Virginia, Josh!  Do you know these folks?  (Slogan: “Take a Shot on Us.”)

StarEngine also is hosting another crowdfunded offering filed today.  The issuer on this offering, GameTree PBC (yes, Haskell, a public benefit corporation!), a social network for gamers based in Solana Beach, California.  GameTree is selling common stock at $2 per share and…

What factors generate a healthy secondary market in securities?  That is my question for this week.  I have found myself struggling with this question since I was first called by a reporter writing a story for The Wall Street Journal about a work-in-process written by one of our colleagues, Seth Oranburg (a Visiting Assistant Professor at Chicago-Kent College of Law).  The article came out yesterday (and I was quoted in it–glory be!), but the puzzle remains . . . .

Secondary securities markets have been hot topics for a while now. I followed with interest Usha Rodrigues’s work on this paper, for example, which came out in 2013.  Yet, that project focused on markets involving only accredited investors.  

Seth’s idea, however, is intended to prime a different kind of secondary market in securities: a trading platform for securities bought by the average Joe (or Joan!) non-accredited investor in a crowdfunded offering (specifically, an offering conducted under the CROWDFUND Act, Title III of the JOBS Act).  [Note: I will not bother to unpack the statutory acronyms used in that last parenthetical expression, since I know most of our readers understand them well.  But please comment below or message me if you need help on that.]  Leaving aside one’s view of the need for or desirability of a secondary market for securities acquired through crowdfunding  (which depends, at least to some extent, on the type of issuer, investment instrument, and investor involved in the crowdfunding), the idea of fostering a secondary securities market is intriguing.  What, other than willing buyers and sellers and a facilitating (or at least non-hostile) regulatory environment, makes a trading market in securities?

Imagine this: You open an email message late in the evening from a law review managing editor.  The message includes as an attachment the edited version of an article being published by the law review–or, more precisely–reprinted by the law review.  So far, so good.

But also imagine your surprise when you open the attachment and find that the edits are extensive–more extensive than you had expected.  So, you dig right in to see what’s amiss.  The first three modifications are changes to footnote citations.  They are incorrect edits.  As you review the edited draft, you find that most of the suggested changes are erroneous or unnecessary.  Some are even undesirable or undesired (e.g., edits to the text of quoted passages that deviate from the source quoted).  In frustration, you wonder whether you should complete your review of the edits or just, based on what you’ve read to date, throw in the towel and ask the law review to start all over, reminding the law review managing editor that the article already has been published and, in the process, edited by you and the other journal’s editors and staff.

I experienced a version of this law scholar nightmare recently. What did I do?  I completed my review…

Jet lag prevented me from posting this yesterday.  (Yes, I am scheduled to be the BLPB every-Monday blogger going forward.)  But at least I am awake enough now to post a bit more on the 7th International Conference on Innovative Trends Emerging in Microfinance (ITEM 7 Conference) I attended last week in Shanghai, China.  My initial post on Wednesday provided some information on Chinese microfinance and the initial day of the conference.  This week, my post focuses on definitional questions that I have been pondering relating to my participation in this series of conferences.  Specifically, I have been sorting through the relationship between microfinance and crowdfunding.  My understanding continues to evolve as I become more familiar with the literature on and practice of microfinance internationally.

At the conference, one of the participants noted that while microfinance and crowdfunding appear to be mutually reinforcing, they still do not enjoy comfortable relations in scholarship and practice.  After weighing that statement for a moment, I had to agree.  I actually have been personally struggling with the nature of the relationship between the two for a few years now.  (I often wonder whether folks like co-blogger Haskell Murray who commonly work in the social…

Andrew Schwartz, a professor at the University of Colorado, has recently published an interesting article discussing how crowdfunding deals with the fundamental problems of startup finance: uncertainty, information asymmetry, and agency costs. His article, The Digital Shareholder, 100 MINN. L. REV. 609 (2015), is available here.

Here’s the abstract:

Crowdfunding, a new Internet-based securities market, was recently authorized by federal and state law in order to create a vibrant, diverse, and inclusive system of entrepreneurial finance. But will people really send their money to strangers on the Internet in exchange for unregistered securities in speculative startups? Many are doubtful, but this Article looks to first principles and finds reason for optimism.

Well-established theory teaches that all forms of startup finance must confront and overcome three fundamental challenges: uncertainty, information asymmetry, and agency costs. This Article systematically examines this “trio of problems” and potential solutions in the context of crowdfunding. It begins by considering whether known solutions used in traditional forms of entrepreneurial finance—venture capital, angel investing, and public companies—can be borrowed by crowdfunding. Unfortunately, these methods, especially the most powerful among them, will not translate well to crowdfunding.

Finding traditional solutions inert, this Article presents five novel solutions…

I mentioned back in October that I spoke in Munich on Regulating Investment Crowdfunding: Small Business Capital Formation and Investor Protection. I discussed how crowdfunding should be regulated, using the U.S. and German regulations as examples.

If you’re interested, that talk is now available here. I expect this to be the top-rated Christmas video on iTunes.

If you want to know more about how Germany regulates crowdfunding, I strongly suggest this article: Lars Klöhn, Lars Hornuf, and Tobias Schilling, The Regulation of Crowdfunding in the German Small Investor Protection Act: Content, Consequences, Critique, Suggestions (June 2, 2015).

Earlier this week, my co-blogger Josh Fershee authored an interesting post about the surprising crowdfunding success of the PicoBrew “Keurig for Beer.” After reading Josh’s post and the embedded links, I have to agree with him; I have no idea how they raised $1.4M for a product that I don’t see being that useful. The product appears to be both overly expensive and overly time-consuming.

I think many venture capitalists would join Josh and me in questioning the wisdom of PicoBrew, at least before it raised $1.4M. But as I wrote in an earlier post, crowdfunding may help overcome biases of venture capitalists. In the days since Josh’s posts, I have heard a few people talk about how excited they were about PicoBrew. These people were all at least 10 years younger than Josh, me, and most venture capitalists. While us “older folks” may not see a use for the product, judging from the crowdfunding results and a little anecdotal evidence here in Nashville, there appears to be significant market demand for PicoBrew. Similarly, on the show Shark Tank, the female “sharks” have accused their male counterparts of largely avoiding companies with products aimed at women; and while I…

No, I am not really going too deep into the crowdfunding legal world. I am mostly venting. My co-bloggers, especially Steve Bradford, Joan Heminway, and Haskell Murray, are far more knowledgable than I am on the actual legal regime. 

Kickstarter and other sites have done some creative things to help people start their businesses, and I am fine with that. There are travel jackets and luggage, as well as other things like potato salad and gadgets that someone thinks someone else needs.  That’s all good.  But some of the ideas just seem dumb to me.  Case in point: the PicoBrew, about which one outlet noted: Seattle company develops ‘Keurig for beer.’ 

So, the deal is that you can make your own beer recipes (or borrow from others), and make beer at home.  Fast(ish).  KOMO News explained: 

Depending on the recipe, users add grain to the main compartment of the step filter and add hops into the appropriate hop cages inside the unit. The entire canister slides into the Zymatic and the brewing begins.

The brewing takes about four hours, leaving the unfermented beer in the keg that originally held the water. Add the

…

One final post on the SEC’s proposed changes to Rule 147 and I promise I’m finished—for now. Today’s topic is the effect the proposed changes will have on state crowdfunding exemptions. If the SEC adopts the proposed changes to Rule 147, many state legislatures will have to (or at least want to) amend their state crowdfunding legislation.

As I explained in my earlier posts here and here, the SEC has proposed amendments to Rule 147, currently a safe harbor for the intrastate offering exemption in section 3(a)(11) of the Securities Act. If the proposed amendments are adopted, Rule 147 would become a stand-alone exemption rather than a safe harbor for section 3(a)(11). There would no longer be a safe harbor for intrastate offerings.

That creates some issues for the states. Many states have adopted state registration exemptions for crowdfunded securities offerings that piggyback on the federal intrastate offering exemption. That makes sense, because, if the offering isn’t also exempted at the federal level, the state crowdfunding exemption is practically worthless. (An offering pursuant to the federal crowdfunding exemption is automatically exempted from state registration requirements, but these state crowdfunding exemptions provide an alternative way to sell securities through crowdfunding.)…