Monday, August 14, 2017
Former BLPB editor Steve Bradford has posted a new paper adding to his wonderful series of articles on crowdfunding (on which I and so many others rely in our crowdfunding work). This article, entitled "Online Arbitration as a Remedy for Crowdfunding Fraud" (and forthcoming in the Florida State University Law Review), focuses on a hot topic in many areas of lawyering--online dispute resolution, or ODR. Steve brings the discussion to bear on his crowdfunding work. Specifically, he suggests online arbitration as an efficacious way of resolving allegations of fraud in crowdfunding. Here's the abstract:
It is now legal to see securities to the general public in unregistered, crowdfunded offerings. But offerings pursuant to the new federal crowdfunding exemption pose a serious risk of fraud. The buyers will be mostly small, unsophisticated investors, the issuers will be mostly small startups about whom little is known, and crowdfunded offerings lack some of the protections available in registered offerings. Some of the requirements of the exemption may reduce the incidence of fraud, but there will undoubtedly be fraudulent offerings.
An effective antifraud remedy is needed to compensate investors and help deter wrongdoers. But, because of the small dollar amounts involved, neither individual litigation nor class actions will usually be feasible; the cost of suing will usually exceed the expected recovery. Federal and state securities regulators are also unlikely to focus their limited enforcement resources on small crowdfunding offerings. A more effective remedy is needed.
Arbitration is cheaper, but even ordinary arbitration will often be too expensive for the small amounts invested in crowdfunding. In this article, I attempt to design a simplified, cost-effective arbitration remedy to deal with crowdfunding fraud. The arbitration remedy should be unilateral; crowdfunding issuers should be obligated to arbitrate, but not investors. Crowdfunding arbitration should be online, with the parties limited to written submissions. But it should be public, and arbitrators should be required to publish their findings. The arbitrators should be experts on both crowdfunding and securities law, and they should take an active, inquisitorial role in developing the evidence. Finally, all of the investors in an offering should be able to consolidate their claims into an arbitration class action.
Although I haven't yet read the paper (which was just posted this morning, it seems), Steve's idea totally makes sense to me on so many levels. Among other things, ODR has a history in e-commerce and social media, two front-runners and foundations of crowdfunding. Also, the dispute resolution expense issue that Steve alludes to in the abstract is real. It has been raised by a number of us, including by me in this draft paper, in which I assert, among other things:
Prosecutors and regulators may not be willing or able to devote financial and human resources to enforcement efforts absent statutory or regulatory incentives or extraordinary policy reasons for doing so . . . . Individual funders also are unlikely to bring private actions or even engage alternative dispute resolution since the cost of vindicating their rights easily could exceed their invested money and time, although the availability of treble damages (often a statutory right for willful violations of consumer protection statutes) or other extraordinary remedies may change the calculus somewhat.
. . . [C]lass actions tend to be procedurally complex—difficult to get in front of a court—and may not be available in some jurisdictions. Moreover, the prospects for recovery are unknown and, based on recent information from U.S. securities class action litigation, financial compensation to individual members of the plaintiff class is likely to be relatively insignificant in dollar value and in relationship to losses suffered, even if the aggregate amount of damages paid by the defendant is relatively high . . . . Accordingly, class action litigation also may be of limited utility in bringing successful legal claims in the crowdfunding context.
This will be an area for much further thought as the crowdfunding adventure continues . . . .