Published: May 9, 2023

Head to GoFundMe's website and, with just a few clicks, you’ll find their claim to have raised approximately $9 billion from more than 120 million donations. On Kickstarter's homepage, they report having funded nearly 240,000 projects with over $7.2 billion directed towards creative work. Crowdfunding's role in the economy clearly goes far beyond 'small change'. In 2012, the federal JOBS Act authorized investment crowdfunding—which, as Professor Andrew Schwartz explains below, "takes the concept one step further by allowing the crowd to buy stock or make some other financial investment on web-based platforms akin to Kickstarter."

In this interview, Professor Schwartz sits down with Colorado Law’s Robyn Munn to chat about his new book, Investment Crowdfunding, the culmination of a decade’s worth of research in this field. Professor Schwartz’s latest, brought to readers by Oxford University Press, provides readers with incisive insights born of the critical analysis of multiple comparative jurisdictions and many practical recommendations for how to construct an effective legal framework around this innovative approach to startup financing. 

RM: Thank you so much for taking the time to speak with me today! First question: What exactly is investment crowdfunding? Can you define it for us?

AS: It’s my pleasure, Robyn. Let me start with ‘crowdfunding,’ which is a general term for raising money over the internet from lots of people (the ‘crowd’), each of whom contributes only a small amount. The original types of crowdfunding were ‘reward’ crowdfunding, like on Kickstarter, and ‘donation’ crowdfunding, like on GoFundMe.

Investment crowdfunding takes the concept one step further by allowing the crowd to buy stock or make some other financial investment on web-based platforms akin to Kickstarter. Previously, this would have been illegal, since federal law requires that a public offering of stock or other securities must go through the formal IPO process, and all the red tape that entails.

But the law can be changed at any time — and so it was. The federal Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama in 2012, included a special regime to authorize investment crowdfunding in the United States. My book, Investment Crowdfunding (not a very creative title, I admit!), analyzes the JOBS Act and its related regulations, and compares them to analogous laws in the UK, EU, Canada, Australia, and New Zealand.

RM: It sounds like this law represents a sort of democratization or ‘opening up’ of pathways for aspiring investors. Is that what inspired you to write Investment Crowdfunding?

AS: Yes, that’s right. Our securities laws have long had a well-intentioned rule that allows companies to raise money without going through a full-blown IPO (initial public offering)—as long as they only allow wealthy, so-called ‘accredited’ investors, to participate. The idea is that accredited investors have a financial cushion that allows them to lose their entire investment in a risky venture, while those of more modest means need protection against losing more than they can afford.

This is a sensible rule but the unfortunate result is that startups over the past few decades have scrupulously excluded the public from investing, and only allowed accredited investors to participate. This always seemed unfair and overly paternalistic to me; after all, grown adults in a free society may spend their money as they see fit—even in ways that seem unwise to the powers-that-be.

When the JOBS Act changed the paradigm and invited ‘retail’ investors to participate on the same footing as accredited investors, I knew this was an area of law that I wanted to devote myself to studying. I’ve spent the past decade doing just that, and not only in the United States, as I’ve conducted research all around the world, including substantial work in New Zealand, where I served as a Fulbright Scholar.

RM: Would it be fair to say investment crowdfunding provides some benefits to groups who have traditionally faced barriers to starting a business?

AS: Absolutely. Investment crowdfunding is designed to be inclusive not only with respect to the investors (as just discussed), but also with respect to entrepreneurs.

For entrepreneurs, the traditional sources of startup funding are venture capital (VC) and angel investors, but female and minority entrepreneurs only receive a very small percentage of such funding. Similarly, entrepreneurs in rural areas, far from VC hotbeds like Silicon Valley, have long found it difficult to raise capital without picking up and moving West.

With the advent of the internet, however, geography is no longer a constraint, and a more inclusive new form of startup finance has become suddenly possible. Using investment crowdfunding, entrepreneurs now have the ability to solicit investments directly from the broad public, rather than having to trek out to Palo Alto and convince a bunch of guys in fleece vests.

This is not only theory, but is playing out in practice. According to a recent report from the SEC that looked at investment crowdfunding companies that raised over $1 million, more than 40% had minority founders and nearly 50% had women founders. These are impressive numbers and much higher than we have traditionally seen.

RM: What are some of the critiques of investment crowdfunding? Do they have merit?

AS: The first concern is over fraud. Many people worry that con artists will post phony information on investment crowdfunding sites and trick the public into investing in phony companies that don’t even exist. By using the internet, they can hide their identities and create the illusion of a thriving company to fool retail investors.

footsteps in the snowI think this concern is overblown. There are plenty of bad actors out there, of course, but investment crowdfunding is an inhospitable place to ply their trade. It’s like robbing a bank in the snow, because all market activity is recorded and stored in a ‘digital trail’ that makes it easy to get caught. Being conducted entirely online, a fraudster’s every act, every utterance, bank account transfer information, IP address, et cetera — it all leads right to their door. So it doesn’t surprise me that there has been just one allegation of fraud since the American market opened seven years ago.

A second concern is that all the best startup companies will get funded in the traditional way (VCs and angels), leaving the crowd with the leftovers that couldn’t catch a bid from the smart money. This issue is known as ‘adverse selection’ (or, more colorfully, the lemons problem), and it is a legitimate issue.

The well-known online publisher, Substack, for instance, was recently unable to raise money from VCs, and so it pivoted to investment crowdfunding. Almost immediately after Substack announced its offering, the offering completely sold out, reaching the $5 million legal limit in less than a day. Maybe the VCs were right and Substack is a lemon; or maybe the crowd is right and it’s a cherry. Time will tell.

In addition, there are a lot of companies that might prefer to raise money from the crowd, so they pursue investment crowdfunding not as a last resort but as a first one. Consumer companies with a passionate group of customers, in particular, can invite them to invest in the company via investment crowdfunding, thereby cementing the relationship and generating publicity. These ‘brand ambassadors,’ as I call them in the book, will buy the product, tell their friends about it, and share the company’s tweets and posts.

This is another way to look at Substack’s investment crowdfunding offering and is just how Substack has framed it. In fact, Substack has affirmatively reached out to its writers and subscribers to invest in the offering and will give them priority when allocating shares.

RM: This all sounds quite revolutionary! How do you envision your book being utilized within this new landscape?

AS: Yoga block, somewhere to lean an iPhone, helpful in crushing spiders . . .

More seriously, the book is a one-stop shop for everything you need to know about the law and practice of investment crowdfunding, as well as ideas for improvement.

I expect it to be useful for entrepreneurs considering their fundraising options and the lawyers who advise them, as well as legal scholars and law students interested in the field. Policymakers around the world will likewise benefit from the critical analysis of multiple comparative jurisdictions and my many practical recommendations for how to construct an effective legal system.

It’s also funny.

RM: Thank you so much for sharing your expertise! Where can readers find Investment Crowdfunding?

AS: Thank you for the opportunity, Robyn. The book is available for pre-order on Amazon and Oxford University Press; at OUP, readers can enter promo code ALAUTHC4 for 30% off the list price.