Proactive Law as Competitive Advantage in Crowdfunding

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.