Proactive Law as Competitive Advantage in Crowdfunding

Proactive Law as Competitive Advantage in Crowdfunding

Jack Wroldsen
DOI: 10.4018/978-1-7998-2448-0.ch036
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This chapter explains how the paradigm of proactive law as competitive advantage can help entrepreneurs succeed in crowdfunding campaigns. Business law scholars have developed theories of “proactive law” and “law as competitive advantage” to show how law can be transformed from an obstacle into a strategic business advantage. This chapter analyzes the evolving crowdfunding landscape through the lens of proactive law as competitive advantage. The chapter proposes several types of innovative securities designed to create competitive advantages in crowdfunding offerings. For example, one type would give crowdfunding investors long-term equity interests while simultaneously eliminating short-term corporate governance challenges for small crowdfunded companies. Apart from securities, the chapter also describes how a proactive approach to law can enhance crowdfunding campaigns in multiple areas, from intellectual property to tax efficiency. To conclude, the chapter suggests expanding the theory of proactive law as competitive advantage to additional areas of entrepreneurship, beyond crowdfunding.
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Background: Regulatory Landscape Of Crowdfunding Offerings

The origins of online crowdfunding were not auspicious. Initially, crowdfunding resulted in more cease-and-desist letters than business success stories. But over time, the creative force of entrepreneurship continues to propel crowdfunding models to break free from the antiquated legal shackles that have restrained crowdfunding’s development. Accordingly, today’s legal panorama for strategic management of crowdfunding campaigns is vastly improved—and significantly more complex—than just a few years ago.

From a legal perspective, entrepreneurs must choose one of two types of crowdfunding offerings: the fork in the regulatory road is whether the crowdfunding campaign will offer securities (e.g., stock, interest-bearing loans, or another form of profit-sharing interests) or something other than securities (e.g., a pre-purchased product, token rewards, or donative support of a nonprofit enterprise, including non-interest bearing loans). Laws treat crowdfunding offerings of securities differently from non-securities (Fallone, 2014). Of course, entrepreneurs may also develop hybrid crowdfunding campaigns that offer a combination of a security and a non-security.

The evolution of laws on crowdfunding of securities has differed markedly from that of non-securities. Both paths, though, epitomize the disruptive interplay between law and entrepreneurship. Innovative entrepreneurship can be a two-edged sword that both creates new business opportunities and simultaneously challenges, and even destroys, stagnant legal regimes. In crowdfunding, the unique paths that securities and non-securities forms of crowdfunding have traversed can be likened metaphorically to tree roots in both their power and resourcefulness.

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