Monday, August 25, 2014
This follows on Ann's post yesterday on Gender and Crowdfunding. Ann, so glad you've joined me and Steve Bradford as securities crowdfunding watchers! Delighted to have you in that informal, somewhat disgruntled "club."
I have been interested in whether securities crowdfunding will democratize business finance. (I note here that Steve Bradford's comment to Ann's post raises the broader question of crowdfunding's ability to better engage underrepresented populations in general.) My interest has, however, been more on the investor (backer) side of the crowdfunding equation than on the business (entrepreneur) side.
As Ann notes, given the delay in the Securities and Exchange Commission (SEC) rulemaking under Title III of the Jumpstart Our Business Startups (JOBS) Act, the information on gender and crowdfunding that we have so far comes from other types of crowdfunding. This information may or may not map well to markets in securities crowdfunding. But it's still worth reviewing the information that we do have.
In their 2013 book, The Crowdfunding Revolution: How to Raise Venture Capital Using Social Media (see pages 65-66), Kevin Lawton and Dan Marom speculate that crowdfunding may help to correct gender imbalances in finance. Relevant studies have begun to emerge. I was interested to see in Ann's post a link to a paper reporting on a gender study of which Dan Marom is a coauthor. Ethan Mollick, another academic (from Wharton) focused on crowdfunding studies from the business side of the aisle--also has released gender data in a few papers. A study posted back in early July finds that, as crowdfunding entrepreneurs "women outperform men, and are more likely to succeed at a crowdfunding campaign, all other things being equal" and that "a small proportion of female backers disproportionately support women-led projects in areas where women are historically underrepresented" (quoting, in each case, from the related abstract). In an earlier paper, Mollick finds that "crowdfunding alleviates some of geographic and gender biases associated with the way that VCs look for signals of quality" (again, quoting from the abstract).
Studies also have begun to emerge on crowd wisdom versus crowd madness, a topic Ann mentioned in passing in her post. (I recently wrote an exploratory piece for the Vermont Law Review linking disclosure regulation to that debate, for those who may be interested.) Again, a paper by Ethan Mollick comes to mind on this issue--one on which Steve Bradford earlier blogged. In that paper, the theater project funding decisions of experts are compared with those of the crowd. The paper shows that there is not much of a difference in the projects funded by experts and those funded by the crowd, although the crowd does fund certain projects that experts choose not to fund. Projects funded by both the experts and the crowd, and those funded by the crowd alone, turn out to be quantitatively and qualitatively comparable (in terms of commercial success and critical acclaim). Expert funding decisions, therefore, may be more conservative than those of the crowd, but that conservatism does not result in markedly different long-term outcomes. Wiser? Well, maybe no less wise . . . .
Left out of all of this, and a big wild card in the securities crowdfunding space, are issues relating to the nature of the intermediaries that will serve securities crowdfunding markets. The potential for democratization may exist in this part of the market, too, with the addition of funding portals to the arsenal of securities intermediaries eligible to participate in crowdfunded offerings under Title III of the JOBS Act. There has been little written on the possible or probably attributes of securities crowdfunding intermediaries, as near as I can tell. Steve Bradford posted back in early July about his recent work on the liability of securities crowdfunding intermediaries, and my U.C. Davis Business Law Journal piece on crowdfunding intermediaries was just reprinted in the Corporate Practice Commentator (at 56 Corp. Prac. Comment. 323 (2014)).
There is a lot to look out for in the securities crowdfunding environment, assuming (a) JOBS Act Title III crowdfunding actually takes off or (b) investment crowdfunding is otherwise facilitated under applicable securities regulation. Neither assumption is necessarily a safe one, however, even if the SEC rules under Title III are soon adopted. And that also is an unknown . . . .