Business Law Prof Blog

NFTs from a Distinctive Angle

Thanks to my dear and patient friend and colleague Nizan Packin, I set out on a research and writing adventure a bit more than eighteen months ago.  The result is a book chapter on NFTs for her forthcoming edited volume, The Cambridge Handbook for the Law and Policy of NFTs.  The chapter is entitled "Non-investment Finance in an NFT World."  At her suggestion, I recently posted the draft chapter to SSRN.  You can find it here, and the abstract is set forth below.

Recent years have witnessed the rise of NFTs as vehicles for non-investment finance, including in nonprofit and political fundraising. As with other financial sectors in which NFTs have a role, the use of NFTs in financing nonprofits and political campaigns and committees has revealed gaps and ambiguities in existing legal regulatory systems. Appetite exists to evolve legal frameworks to complete and clarify applicable bodies of law and regulation.

This chapter undertakes to illuminate and reflect on the use of NFTs in financing nonprofits, political campaigns, and political committees. It begins by reviewing general aspects of the non-investment Internet finance environment and then describes and illustrates the use of NFTs in nonprofit and political fundraising. The chapter also offers guidance and reflections on core issues under applicable law and regulation and reflections on legal and regulatory questions and approaches relevant to non-investment finance using NFTs.

Those who know my work will recognize the roots of this chapter in the research I have conducted and published on crowdfunding.  My writing on and work with nonprofits also makes a cameo appearance in the chapter.  This one stretched my brain a bit (and that of my research assistant, too).

Book and Upcoming Symposium: Investment Crowdfunding

Friend-of-the-BLPB Andrew Schwartz has written his first book on a topic about which we both enjoy thinking and researching and writing: investment crowdfunding.  We have been cohabiting this corporate finance space for more than ten years now.  All credit is due to Andrew for laying down these words—his hard-fought wisdom—in a book.  He captures so much about the law and regulation of crowdfunding in the investment context in this volume.  I had the opportunity to offer some feedback to Andrew during the drafting process.   I recommend having the book on your bookshelves.

Colorado Law is hosting an event on its campus in Boulder on September 8, The Future of Startup Finance: A Symposium on "Investment Crowdfunding", honoring the release of the book, which is entitled Investment Crowdfunding.  If you are in the neighborhood, you’ll want to stop by.  Among the invited speakers are many friends from the corporate finance law academy, as well as former SEC Commissioner Allison Herren Lee.

Congrats to Andrew!

Teaching Race & Entrepreneurship: A Guest Post from Prof. Priya Baskaran

Given anti-democratic events at the nation’s Capitol which were made possible by continued structural injustice in the U.S. – I feel obligated as a lawyer and professor to emphasize our responsibilities to address the interlocking systems of subordination that impact every area of the law – with entrepreneurship being no exception. These systems divide us into “haves” and “have nots” based on race, gender, class, and even geography.

We have a moral obligation as lawyers and professors to address these structural barriers in the classroom. Entrepreneurship is often touted as a means for greater economic participation and a vehicle for innovation. Yet many entrepreneurs and small businesses are hobbled by barriers rooted in structural injustice. These obstacles prevent them from raising necessary capital, accessing legal resources, obtaining other technical assistance, and numerous impediments related to operations such as insurance and talent retention. A full accounting of existing barriers, though important, is insufficient. We must examine the legal roots of modern structural barriers to entrepreneurship - interlocking systems of subordination based on race, class, and gender. Sadly, U.S. laws and policies have actively devalued certain populations and entire communities, elevating certain communities while relegating others to the economic margins. For example, redlining influenced decades of public and private investment, decimating both the inner-city as well as rural areas.

Law professors must equip our students to be thoughtful, diligent, competent, compassionate, and ethical lawyers. As part of this education, students must confront, and unpack legal regimes and reckon with their practical impacts. At a minimum, our students will engage with state and local policy as private attorneys, regulators, and even elected officials. Grounding them in a thorough understanding of the impacts of structural barriers and empowering them to create change by demanding legal reforms is a task we must embrace.

This blog post expands on my presentation at the AALS 2021 Annual Meeting, where I outlined methods for introducing this vital and complex topic into the business law classroom. Below, I detail my learning goals, lesson plans, and provide some additional materials that may prove helpful for other business law professors. This class was first designed and implemented during my time as an Associate Professor at West Virginia University’s College of Law. I mention this to emphasize that the demographics of a law school student body or fellow faculty should not deter academics from engaging in these topics. I have also modified this class successfully for my current students at American University’s Washington College of Law. I can attest that the class has resulted in important and rich dialogue in both law school classrooms. (Please click below for more.)

 

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U.S. Securities Crowdfunding: A Way to Economic Inclusion for Low-Income Entrepreneurs in the Wake of COVID-19?

Earlier today, I submitted a book chapter with the same title as this blog post.  The chapter, written for an international management resource on Digital Entrepreneurship and the Sharing Economy, represents part of a project on crowdfunding and poverty that I have been researching and thinking through for a bit over two years now.  My chapter abstract follows:

The COVID-19 pandemic has exacerbated and created economic hardship all over the world.  The United States is no exception.  Among other things, the economic effects of the COVID-19 crisis deepen pre-existing concerns about financing U.S. businesses formed and promoted by entrepreneurs of modest means.

In May 2016, a U.S. federal registration exemption for crowdfunded securities offerings came into existence (under the CROWDFUND Act) as a means of helping start-ups and small businesses obtain funding.  In theory, this regime was an attempt to fill gaps in U.S. securities law that handicapped entrepreneurs and their promoters from obtaining equity, debt, and other financing through the sale of financial investment instruments over the Internet.  The use of the Internet for business finance is particularly important to U.S. entrepreneurs who may not have access to funding because of their own limited financial and economic positions. 

As the pandemic continues and the fifth year of effectiveness of the CROWDFUND Act progresses, observations can be made about the role securities crowdfunding has played and may play in sustaining and improving prospects for those limited means entrepreneurs.  A preliminary examination indicates that, under current legal rules, securities crowdfunding is a promising, yet less-than-optimal, financing vehicle for these entrepreneurs.  Nevertheless, there are ways in which U.S. securities crowdfunding may be used or modified to play a more positive role in promoting economic inclusion through capital raising for the innovative ventures of financially disadvantaged entrepreneurs and promoters.

I value the opportunity to contribute to this book with scholars from a number of research disciplines and countries.  I have been looking for ways to concretize some of my ideas from this project in a series of shorter publications, and this project seems like a good fit.  Nevertheless, I admit that I have been finding it challenging to segment out and organize my ideas about how securities crowdfunding may better serve entrepreneurs and investors, especially in the current economic downturn.  As always, your ideas are welcomed.

Curiosity and Skepticism Make Me Want To Read This Article . . . .

Friend of the BLPB and fellow crowdfunding researcher Andrew Schwartz recently posted this article on SSRN: Mandatory Disclosure in Primary Markets, 2019 Utah L. Rev. 1069.  I was provoked by the abstract, which reads as follows:

Mandatory disclosure—the idea that companies must be legally required to disclose certain, specified information to public investors—is the first principle of modern securities law. Despite the high costs it imposes, mandatory disclosure has been well defended by legal scholars on two theoretical grounds: ‘Agency costs’ and ‘information underproduction.’ While these two concepts are a good fit for secondary markets (where investors trade securities with one another), this Article shows that they are largely irrelevant in the context of primary markets (where companies offer securities directly to investors). The surprising result is that primary offerings—such as an IPO—may not require mandatory disclosure at all. This profound insight calls into question the fundamental premises of the Securities Act of 1933 and similar laws governing primary offerings around the world. Reform of these rules could lead to a new age of simplified, low-cost primary offerings to the public, something that is already happening in New Zealand through its equity crowdfunding market.

As someone who believes that federal law should provide an exemption for small crowdfunded offerings (although current rule-making proposals instead look to ratchet up the aggregate offering prices for the federal crowdfunding exemption) with lighter mandatory disclosure obligations than those provided for under Title III of the Jumpstart Our Business Startups Act and Regulation Crowdfunding, I found myself very curious about Andrew's paper.  So, I skimmed it (since I do not have time to read it in full at the moment).  I am glad to see that the article raises a distinction worth more exploration in the mandatory disclosure space--that between primary and secondary offerings.  But I admit to some skepticism about the overall thesis as to the lack of value of mandatory disclosure in primary offerings.  I hope a thorough review of the paper will provide important information and analyses.  

As the abstract and a recent post on the article on The CLS Blue Sky Blog indicate, the paper highlights for attention two of the theoretical values of mandatory disclosure for examination: its positive effects on agency costs and on information underproduction.  Given those ostensible focuses, here are a few things I will be looking for as I read:

• An articulation of the different types of agency costs associated with initial public offerings (IPOs) and other primary offerings (as evidenced in the literature) and their relationship to mandatory disclosure obligations, as well as observations on the effects of mandatory and voluntary disclosure on those agency costs;
• A rationale for why other theories supporting mandatory disclosure regulation are seemingly marginalized or omitted in the paper, including (1) standardization to facilitate investor comparisons and contrasts (which it seems is mentioned in a few footnotes) and (2) efficient capital market theory applications in the IPO disclosure context (including, perhaps, those impacting observed underpricing/overpricing market effects); and
• An explanation of the role, if any, of investor sophistication and information access (which, together with mandatory disclosure, have framed analyses of the value of mandatory disclosure since the Court's Ralston Purina decision more than 65 years ago) in the article's analyses and overall thesis.

By quick inspection, it appears that the agency costs addressed are restricted to those borne of a manager-shareholder relationship that relies on a somewhat legalistic, rather than economic, concept of agency that would arise only after investors in the market purchase shares of corporate stock in an offering and become shareholders.  I wonder about the role of managers and others as promoters of the offering . . . .  Standardization is at least mentioned in a few places.  And as to the third bullet point, it looks like the answer the paper proffers is that institutional investors will drive significant voluntary disclosure to be made to all in a manner that gets information to the market efficiently.  If that is the argument, I look forward to seeing the evidence.  

So, I am curious, but I remain skeptical.  I am reserving judgment until I read the article in its entirety!  Regardless, this work has my attention, for sure.  Let me know if you have read it and, if so, what your reactions are.  Andrew also may want to comment.

Independent of the mandatory disclosure arguments, I know that I will enjoy reading about New Zealand's crowdfunding experience.  I do find comparative regulatory work like this very enlightening.  I appreciate Andrew adding that to the mix, too.

What Law Should Govern Enforcement or Invalidation of Standard Consumer Contract Terms?

Last week, I attended the American Law Institute (ALI) Annual Meeting in Washington, DC.  (I am back in The District this week for the Law and Society Association Annual Meeting.  More on that in a later post.)  Many important project drafts and projects were vetted at the ALI meeting.  As many readers know, however, the tentative draft of the Restatement of the Law, Consumer Contracts generated some significant debate in advance of and at the conference.  The membership approved part of the draft of the project at the meeting, but much still is to come.  

I want to briefly pick up a small thread here from the portions of the proposed Restatement discussed at the meeting that relates to some of the work I have done on crowdfunding.  Crowdfunding platforms, like most web-based service businesses, use standard form "terms of use" that the service provider and customer end-user may desire to enforce under contract law.  Unsurprisingly, many of the terms of use for websites of this kind (and crowdfunding platform sites are no exception to the rule) are protective of the interests of the service provider.  These terms include, for example, mandatory arbitration provisions and waivers of jury trial and class action rights.

As many of you likely know, there has been significant litigation about the enforceability of these kinds of provisions in form agreements--and whether a valid contract has been formed at all.  See, e.g., this article from earlier this year.  As the debates on the Restatement proceeded at the meeting, I found myself thinking about whether the common law of contracts is the best way to handle legal challenges to standard form contracts.  Something inside me just kept screaming for a more tailored legislative solution . . . .

After conclusion of the ALI Annual Meeting, I found this testimony before the Senate Judiciary Committee from Myriam Gilles, Paul R. Verkuil Research Chair and Professor at Cardozo Law.  She notes in that testimony:

[W]hen pre-dispute arbitration clauses and class action bans are forced upon consumers and employees in take-it-or-leave-it, standard-form agreements, “the probability of litigation positions is highly asymmetrical: the seller is far more likely to be the defendant in any dispute, and the consumer the plaintiff.” There is no negotiation, no choice, and the resulting arbitration procedures are not, in truth, intended to provide a forum to resolve claims. The one and only objective of forced, pre-dispute, class-banning arbitration clauses is to suppress and bury claims. The whole point is that consumers and employees seeking redress for broadly distributed small- value harms cannot and will not pursue one-on-one arbitrations.

(footnotes omitted) Professor Gilles recommended a legislative solution.

I do not teach contracts.  Perhaps those of you who do have comments on this matter that negate what I have written here.  If so, please share them.  In general, as a corporate finance lawyer, I favor private ordering.  But consumer contracts are a whole other animal, distinct from merger or acquisition and other corporate finance agreements.  Perhaps we should decrease pressure on the courts by focusing some legislative attention on the appropriate form of standardized terms in consumer contracts that operate as contracts of adhesion or otherwise offend public policy.  I am not sure quite what that looks like overall, but the idea seems to bear further thought . . . .

 

Symposium Announcement: The Urgency of Poverty

Following is an announcement for an upcoming symposium that will tackle some challenging topics, including those related to the role corporate law plays in addressing poverty.  I, of course, would probably talk about the role of "entity law," rather than "corporate law," but that's just me.  Regardless, this should be an interesting and enlightening discussion, and I look forward to seeing the papers that come from it.  

On Thursday, October 25, 2018, The University of Tennessee Law School and the Tennessee Journal of Race, Gender, & Social Justice will be hosting a Symposium titled The Urgency of Poverty. The Symposium reflects on the Poor People's Campaign of 1968 and the continued injustices which have led to the current revival. The Symposium further explores the important role transactional lawyers and scholars must play in advocating for economic justice in modern America.

The Symposium will include panels on (1) Environmental Justice, (2) Intersection of Civil Rights and Economic Justice, (3) Solidarity Economies, and (4) Reforming Corporate Law. Professor Philip Alston, the U.N. Special Rapporteur on Extreme Poverty, and Human Rights, will deliver the keynote. The Symposium is accompanied by a dedicated publication featuring essays and articles from Transactional Professors of Color.

More information is available here: https://law.utk.edu/alumni/get-involved/cle/the-urgency-of-poverty/

 

日本からのご挨拶 - My Japanese Adventure

Hello to all from Tokyo, Japan (Honshu).  I have been in Japan for almost a week to present at and attend the 20th General Congress of the International Academy of Comparative Law (IACL), which was held last week in Fukuoka, Japan (Kyushu).  By the time you read this, I will be on my way home.

As it turns out, I was at the Congress with old business law friends Hannah Buxbaum (Indiana Maurer Law), Felix Chang (Cincinnati Law), and Frank Gevurtz (McGeorge Law), as well as erstwhile SEALS buddy Eugene Mazo (Rutgers Law).  I also met super new academic friends from all over the world, including several from the United States.  I attended all of the business law programs after my arrival (I missed the first day due to my travel schedule) and a number of sessions on general comparative and cross-border legal matters.  All of that is too much to write about here, but I will give you a slice.

I spoke on the legal regulation of crowdfunding as the National Rapporteur for the United States.  My written contribution to the project, which I am told will be part of a published volume, is on SSRN here.  The entire project consists of eighteen papers from around the world, each of which responded to the same series of prompts conveyed to us by the General Rapporteur for the project (in our case, Caroline Kleiner from the University of Strasbourg).  The General Rapporteur is charged with consolidating the information and observations from the national reports and synthesizing key take-aways.  I do not envy her job!  The importance of the U.S. law and market to the global phenomenon is well illustrated by this slide from Caroline's summary.

The Congress was different from other international crowdfunding events at which I have presented my work.  The diversity of the audience--in terms of the number of countries and legal specialties represented--was significantly greater than in any other international academic forum at which I have presented.  Our panel of National Rapporteurs also was a bit more diverse and different than what I have experienced elsewhere, including panelists hailing from from Argentina, Brazil, Canada, France, Germany, Poland, and Singapore (in addition to me).  At international conferences focusing on the microfinance aspects of crowdfunding, participants from India and Africa are more prominent.  I expect to say more about the individual national reports on crowdfunding in later posts, as the need or desire arises.

A few outtakes on other sessions follow.

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Professional Responsibility in an Age of Alternative Entities, Alternative Finance, and Alternative Facts

Like my fellow editors here at the BLPB, I enjoyed the first Business Law Prof Blog conference hosted by The University of Tennessee College of Law back in the fall.  They have begun to post their recently published work presented at that event over the past few weeks.  See, e.g., here and here (one of several newly posted Padfield pieces) and here. I am adding mine to the pile: Professional Responsibility in an Age of Alternative Entities, Alternative Finance, and Alternative Facts.  The SSRN abstract reads as follows:

Business lawyers in the United States find little in the way of robust, tailored guidance in most applicable bodies of rules governing their professional conduct. The relative lack of professional responsibility and ethics guidance for these lawyers is particularly troubling in light of two formidable challenges in business law: legal change and complexity. Change and complexity arise from exciting developments in the industry that invite—even entice—the participation of business lawyers.

This essay offers current examples from three different areas of business law practice that involve change and complexity. They are labeled: “Alternative Entities,” “Alternative Finance,” and “Alternative Facts.” Each area is described, together with significant attendant professional responsibility and ethics challenges. The essay concludes by offering general prescriptions for addressing these and other professional responsibility and ethics challenges faced by business lawyers in an age of legal change and complexity.

I do not often write on professional responsibility issues.  However, I do feel an obligation every once in a while to add to the literature in that area addressing issues arising in transactional business law.  In essence, it's service through scholarship.  

I hope you read the essay and, if you do, I hope you enjoy it.  I also can recommend the commentary on it published by my UT Law faculty colleague George Kuney and my student Claire Tuley.  Both comments will be available electronically in the coming months.  I will try to remember to post links . . . .

Aliens and Public Benefit Corporations

A former student brought this fundraising website to my attention: To the Stars Academy of Arts and Sciences ("TTS Academy). (Image above from a Creative Commons search).

This article describes TTS Academy as follows: "Former Blink-182 singer and guitarist Tom DeLonge is taking his fascination with/conspiracy theories about UFOs to their logical conclusion point: He's partnering with former government officials on a public benefit corporation studying 'exotic technologies' from Unidentified Aerial Phenomenon (UAP) that the consortium says can 'revolutionize the human experience.'" 

Remember the Blink-182 song Aliens Exist? 

I couldn't make this up. And I did spend some time trying to determine if it was a joke, but TTS Academy's 63-page offering circular suggests that it is no joke. And TTS Academy appears to have already raised over $500,000. 

According to the organization's website, Tom DeLonge of Blink-182 fame is in fact the CEO and President. Supposedly, DeLonge has teamed with former Department of Defense official Luis Elizondo who confirmed to HuffPost that the TTS Academy is planning to "provide never before released footage from real US Government systems...not blurry, amateur photos, but real data and real videos." Rolling Stone reports that "DeLonge has long been interested in UFO and extraterrestrial research. After parting ways with Blink-182 in 2015, he delved deeper into the subject, releasing the book Sekret Machines: Gods earlier this year and he's also working on a movie that is related to those interests called Strange Times." TTS Academy is a Public Benefit Corporation, formed in Delaware. 

The TTS Academy website states: "To The Stars Academy is a Public Benefit Corporation (PBC), which means our public benefit purpose is a core founding principle of our corporate charter alongside the traditional goal of maximizing profit for shareholders." Hmm... How does one pursue a public benefit purpose and seek to maximize profit for shareholders? A main point of benefit corporations is liberate companies from the perceived restrictions of shareholder wealth maximization. 

The website continues: "Our public purpose: Education - Community - Sustainability - Transparency. PBCs have enjoyed a surge in popularity as the public becomes more interested in corporate responsibility, transparency, and more recently, the concept of impact investing.* It’s clear that an expanding portion of the general population is looking to make an impact on the world around them, not only through volunteering, or speaking out on social media, but through financial decision making.** We believe raising resources through Regulation A+ crowdfunding will allow us to expedite expansion of TTS Academy’s PBC initiatives, like promoting citizen science, enhancing traditional education with science, engineering and art-related programming, supporting veterans and their families, and promoting underrepresented people in film." Color me skeptical. 

As Professor Christine Hurt noted way back in 2014/15, the crowdfunding and social enterprise circles may overlap significantly. Professor Hurt wrote, "for-profit social entrepreneurship may find equity crowdfunding both appealing and available. For-profit social entrepreneurs may be able to use the crowdfunding vehicle to brand themselves as pro-social, attracting individual and institutional cause investors who may operate outside of traditional capital markets and may look for intangible returns. Just as charitable crowdfunders rebut the conventional wisdom that donors expect tax-deductibility, prosocial equity crowdfunders may rebut the conventional wisdom that early equity investors expect high returns or an exit mechanism." Not sure if she, or any of us, predicted exactly this type of company. 

Steve Bradford on Online Dispute Resolution for Crowdfunding Fraud

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 . . . .

Call for Papers - Alternative Finance and Financial Inclusion - Burgundy School of Business

Call for Papers

Financial Inclusion: A Sustainable Mission from Microfinance to Alternative Finance

Social and Technological Paradigms

ITEM 8

Dijon, France

December 7-8, 2017

CEREN, EA 7477, Burgundy School of Business - Université Bourgogne Franche-Comté

Microfinance has sought to include individuals that financial institutions exclude. The mission has been progressively widening to alternative finance, which has thrived outside of conventional financial instruments and channels.

Alternative finance takes different forms, such as angel investment, asset funding, cash flow funding, crowdfunding, crypto-currencies (Bitcoin), fair investment, fintech, slow money, pension fund investments, social impact bonds, etc. All the types have resulted from social and/or technological innovations or a mix of both. They provide significant values to customers and investors. Some of the benefits include absence of lengthy applications, low documentation, almost no collateral, minimum or no credit score requirements, high approval rates, and fast funding.

Alternative finance has also widened the base of customers. While microfinance mainly aimed at making financial services available to people at the ‘Bottom of the Pyramid’, alternative finance has gone beyond to target not only the poor, but also small enterprises, young and innovative ventures, women, minorities, individuals with no credit history, and any other audience excluded by the conventional institutions. While microfinance’s target is mainly the poor, alternative finance’s finance is the excluded.

The Burgundy School of Business will organize the 8^th edition of its annual conference “Institutional and Technological Environments of Microfinance” (ITEM) on "financial inclusion" in Dijon, France on 7^th and 8^th December 2017.

The conference welcomes research papers, monographies, case studies, PhD research-in-progress and experiential insights on different topics and experiments of alternative finance. ITEM encourages in particular reflections on the social and technological innovations, which broaden and deepen the range of alternative finance.

The leading topic is "Financial Inclusion: A Sustainable Mission from Microfinance to Alternative Finance--Social and Technological Paradigms". However, the conference welcomes other related topics that scope out the perspective and discussion on financial inclusion.

As the preceding editions, the ITEM conference provides a forum for both academic researchers and practitioners to discuss and exchange.

Submission procedure:

Proposals: All contributions require a proposal in the first instance. A proposal is a short abstract between 300 and 500 words, containing the research objectives, methodology, findings, recommendations and up to five keywords, the full names (first name and surname, not initials), email addresses of all authors, and a postal address and telephone number for at least one contact author.

Submission period for the proposals: Up to September 15, 2017.

Acceptance of proposals: By September 30, 2017. Notifications will be sent out to relevant authors. Please indicate clearly the contact author(s) and their email address(es).

Full paper: Upon acceptance of proposal, full papers are required. The paper includes abstract, keywords, references and a text of less than 5000 words.

Due date for the full papers: Up to November 30, 2017.

Publication opportunity: Papers presented at the conference will also be considered for publication in collaborating journals.

Contacts:

• [email protected]
• [email protected]

Fees for registration:

• 300 Euros for academic and professional participants and presenters
• 250 Euros for early-bird (before October 31)
• 100 Euros for students
• 70 euros for early bird students (before October 31)

All are invited to complete registration and payment by November 30, 2017.
Details are also available on the ITEM 8 website.

Web site: http://item-8.blogspot.com

Special attraction: The flying club of Darois is willing to take you for an aerial trip over the historical wine region in a ULM (ultra-léger motorisé--ultra-light aircraft) for a modest fee. Depending on the number of people interested, they will fix the price.

Social Enterprise Law Conference and Handbook

Later this week, I will head to Indiana to present at and attend a social enterprise law conference at The Law School at the University of Notre Dame.  The conference includes presentations by participating authors in the forthcoming Cambridge Handbook of Social Enterprise Law, edited by Ben Means and Joe Yockey.  The range of presentations/chapters is impressive.  Fellow BLPB editors Haskell Murray and Anne Tucker also are conference presenters and book contributors.

Interestingly (at least for me), my chapter relates to Haskell's post from last Friday.  The title of my chapter is "Financing Social Enterprise: Is the Crowd the Answer?"  Set forth below is the précis I submitted for distribution to the conference participants.

Crowdfunding is an open call for financial backing: the solicitation of funding from, and the provision of funding by, an undifferentiated, unrestricted mass of individuals (the “crowd”), commonly over the Internet. Crowdfunding in its various forms (e.g., donative, reward, presale, and securities crowdfunding) may implicate many different areas of law and intersects in the business setting with choice of entity as well as business finance (comprising funding, restructuring, and investment exit considerations, including mergers and acquisitions). In operation, crowdfunding uses technology to transform traditional fundraising processes by, among other things, increasing the base of potential funders for a business or project. The crowdfunding movement—if we can label it as such—has principally been a populist adventure in which the public at large has clamored for participation rights in markets from which they had been largely excluded.

Similarly, the current popularity of social enterprise, including the movement toward benefit corporations and the legislative adoption of other social enterprise business entities, also stems from populist roots. By focusing on a double or triple bottom line—serving social or environmental objectives as well as shareholder financial wealth—social enterprises represent a distinct approach to organizing and conducting business operations. Reacting to a perceived gap in the markets for business forms, charters, and tax benefits, social enterprise (and, in particular, benefit corporations) offer venturers business formation and operation alternatives not available in a market environment oriented narrowly around the maximization or absence of the private inurement of financial value to business owners, principals, or employees.

Perhaps it is unsurprising then, that social enterprise has been relatively quick to engage crowdfunding as a means of financing new and ongoing ventures. In addition, early data in the United States for offerings conducted under Regulation CF (promulgated under the CROWDFUND Act, Title III of the JOBS Act) indicates a relatively high incidence of securities crowdfunding by social enterprise firms. The common account of crowdfunding and social enterprise as grassroots movements striking out against structures deemed to be elitist or exclusive may underlie the use of crowdfunding by social enterprise firms in funding their operations.

Yet, social enterprise’s early-adopter status and general significance in the crowdfunding realm is understudied and undertheorized to date. This chapter offers information that aims to address in part that deficit in the literature by illuminating and commenting on the history, present experience, and future prospects of financing social enterprise through crowdfunding—especially securities crowdfunding. The chapter has a modest objective: to make salient observations about crowdfunding social enterprise initiatives the based on doctrine, policy, theory, and practice.

Specifically, to achieve this objective, the chapter begins by briefly tracing the populist-oriented foundations of the current manifestations of crowdfunding and social enterprise. Next, the chapter addresses the financing of social enterprise through crowdfunding, focusing on the relatively recent advent of securities crowdfunding (including specifically the May 2016 introduction of offerings under Regulation CF in the United States). The remainder of the chapter reflects on these foundational matters by contextualizing crowdfunded social enterprise as a part of the overall market for social enterprise finance and making related observations about litigation risk and possible impacts of securities crowdfunding on social enterprise (and vice versa).

Please let me know if you have thoughts on any of the matters I am covering in my chapter or resources to recommend in finishing writing the chapter that I may not have found.  I seem to find new articles that touch on the subject of the chapter every week.  I will have more to say on my chapter and the other chapters of the Handbook after the conference and as the book proceeds toward publication.  

Tricks and Treats: My October as a Law Professor

My October included some signifiant tricks and a bunch of parallel treats.  I will highlight but a few of each here.  They illustrate, in my view, the busy mid-semester lives that law professors may have.

The Tricks

It was a real trick for me to give three distinct presentations in three cities (two in person and one virtually) in a two-day period early in the month.  On the morning of October 6, I participated in a panel discussion at The Crowdfunding Conference in New York City (New York).  That afternoon, I jumped on a plane for Little Rock (Arkansas), where I gave a continuing legal education presentation on crowdfunding for the Arkansas Bar Association as part of a program on "Capital Raising Today and Securities Law Issues."  Finally, later that day, I was Skyped into a the North Carolina Law Review 2016 annual symposium in Chapel Hill (North Carolina) on "The Role of Law in Entrepreneurship," at which I presented a draft paper, forthcoming in the North Carolina Law Review, on the important role of business finance lawyers in entrepreneurial enterprise.  

It then was a trick to refocus my energy on faculty hiring a few days later.  That next week, I jetted off to Washington (DC) with my fellow Appointments Committee members and our Dean and Associate Dean for Academic Affairs for a UT Law alumni reception and the Association of American Law Schools (AALS) 2016 Faculty Recruitment Conference.  We were successful in interviewing a variety of folks for our two business law openings--one in the clinic and one in the doctrinal faculty.

After only a few nights home in my own bed, it was (again) a trick to haul my body into the car to drive to Lexington (Virginia) to participate in and attend the Washington and Lee Law Review's 2016 Lara D. Gass Annual Symposium, an event focusing on "Corporate Law, Governance, and Purpose: A Tribute to the Scholarship of Lyman Johnson and David Millon."  At that symposium, my presentation addressed shareholder wealth maximization as a function of firm-level corporate governance.  My essay on that topic will be published in a forthcoming issue of the Washington and Lee Law Review.

Before the next week was out, I accomplished yet another trick.  I drove up to Louisville (Kentucky) to offer my thoughts on current securities litigation issues for the Kentucky Bar Association 2016 Securities Law Conference.  I was asked to cover insider trading and liability under federal and state securities laws.  In fulfillment of this charge, I delivered a presentation entitled "Where There’s a Securities Market, There’s Fraud (and Other Misconduct): Hot Topics in Federal Securities Litigation."

My final October trick?  Fitting in my Business Associations oral midterm examinations and my Monday and Wednesday class meetings for Business Associations and Corporate Finance with all these trips.

The Treats

All of that effort was an investment, however.  The trips, presentations, and other interactions all yielded multiple benefits.  Most of them may be obvious, but I will list a few in any case.

• I met lots of new and interesting folks from the crowdfunding industry, local bar associations, the AALS applicant pool, and the law academy (from the United States and abroad).
• I got great feedback on my current work and new ideas, research avenues, and citation sources for my ongoing work.
• I was able to honor two amazing colleagues, Lyman Johnson and David Millon.
• I participated meaningfully in the important task of recruiting new faculty to UT Law.
• I squeezed in some important family and personal time around the edges, including in attending the Knoxville Brewers Jam with my hubby (the tickets having been part of my anniversary gift to him back in August).

I am grateful for safe travels throughout the month.  Having said that, I admit that I am relieved all that travel and activity is over and done.  I look forward to a more calm November and a fun holiday season to follow.  In the mean time, however, I will continue to enjoy the fall, with pumpkins being among my favorite hallmarks of the season.

Crowdfunding and Creatives

This Friday, I will co-present on a continuing legal education panel on "The New Crowdfunding Laws for Private Investors & Other Ways to Legally Raise Money For Your Project" at the Americanafest--the Americana Music Festival and Conference.   The program description is set forth below.

There have been significant changes in federal and state laws related to soliciting investors through crowdfunding and other types of investment activities.  These new changes are designed to make certain types of investments easier and more accessible to people and businesses who seek investors for their projects. This panel will discuss those new laws and strategies of how to seek small to moderate size investments under today’s federal and state law. The panel will also discuss “dos” and “don’ts” for those seeking out investors and what to look for when offered an investment opportunity.

I love cultivating this ground, even if I have done much of it in the past with different audiences.  I will prepare some specialized information relating to financing music and other creative projects, for example, for this program.  I also plan to discuss important traps for the unwary.

What I really want to know is: what else might folks working with and in the music industry (or with other artistic and creative business venturers) want to know?  I have some ideas based on my research on crowdfunding to date.  But send me your ideas . . . .  No doubt, a whole new discussion may be generated from audience questions.  But I would love to be as prepared as possible.

A Bit More Title III Crowdfunding Data . . . .

We are now more than three months into the Title III crowdfunding experiment.  I have been wanting to get back to posting on Title III crowdfunding since my "LIVE" post back in May, but so much other fun stuff has been going on!  So, to make me feel a bit better on that point, I will share some current crowdfunding data with you all in this post based on publicly available information obtained from a Westlaw search performed yesterday (Sunday, August 21, 2016).  [Note to the powers that be at the SEC:  EDGAR makes it hard to find the aggregated set of Form C filings unless you are collecting data on an ongoing basis.  I hope that changes as EDGAR continues to improve . . . .]  

At the outset, I will note that others have offered their own reports on Title III crowdfunding since I last posted (including here, here, and here).  These reports offer some nice summaries.  This post offers a less comprehensive data dump focusing in on completed offerings and withdrawn offerings.  At the end, I offer some limited observations from the information provided here about crowdfunding as a small-business capital-raising alternative, the need for EDGAR adjustments, inferences about the success of Title III crowdfunded offerings, and platform disclosure about withdrawn offerings.

First, however, the top-level Westlaw-based summary:

Total Form C filings: 85 (275 filings show on Westlaw, but only 85 are non-exhibit filings representing distinct offerings)
Total Form C/A filings (amendments, including exhibit filings): 153
Total Form C-U filings (updates): 4
Total Form C-W filings (withdrawals): 2

The remainder of this post takes a shallow dive into the updates and withdrawals.  Filings in each case are presented in reverse chronological order by filing date.  All referenced dates are in 2016.  Issuer names are copied from filings and may not be the actual legal names of the entities.

Continue reading

The Value of Scholarship "Extras"

I was recently invited to write a short piece on crowdfunding and investor protection for a special issue of one of the publications of the CESifo Group Munich, the CESifo DICE Report--"a quarterly, English-language journal featuring articles on institutional regulations and economic policy measures that offer country comparative analyses."  The group of authors for this publication (present company excluded) was truly impressive, and I have enjoyed reading their submissions.  My contribution is published here on the CESifo website and here on SSRN, for those who care to look it over.  

I did not hesitate to accept the CESifo Group's invitation to publish this paper, even though it is not primary scholarship and the deadline was tight for me given other professional obligations.  (The editors did allow me to negotiate a bit on the timing, however.)  The purpose of my post today is to explain why I decided to take this opportunity.  With the limited time that we all have to produce research papers, why would I invest in this kind of an "extra" publication--one that is not likely to get me full scholarly credit (whatever that may mean) in a critical assessment of my body of work?  Here are four reasons why I value this kind of project (if I can fit it in with my primary professional obligations).

1. A publication with an interdisciplinary international research group puts a scholar's name and pre-existing scholarship (some of which typically is cited in the piece) in front of a new audience.
2. A short, summary research paper of this kind offers the opportunity to synthesize or re-synthesize ideas from prior research and writing--a skill that (in my experience) improves with practice and is useful in other writing as well as in teaching.
3. The reductive, focused writing process may reveal fresh insights, and these may lead to new research, writing, or teaching.
4. Leveraging prior research by using it for multiple, distinct projects is efficient--and smart.

You may or may not agree with these reasons.  You may have other reasons for publishing this kind of work--or reasons for not doing so.  I invite you to add them in the comments.  And if you are untenured, not yet fully promoted, or otherwise subject to adverse employment action relating to scholarship activity, you'll likely want to check with your dean and trusted senior members of your faculty (including any associate dean for faculty development) before accepting a publication invitation of this kind.  Each institution honors these "extra" publications differently . . . . 

Crowdfunding for the Olympics

As loyal readers may have noticed, I am excited about the upcoming Summer Olympic Games in Rio.

While the Olympics is sure to be heavily watched, the Games are not that lucrative for many of the participants. The average Olympian supposedly only makes around $20,000 a year from sponsorships and has significant travel, medical, and coaching costs.

On the GoFundMe website alone, there are over 140 campaigns in their "Athletes Competing in Rio" category. Collectively, the campaigns have raised over $680,000.

Here are a few stories about Olympic athletes using crowdfunding. (Inc., Forbes, USA Today).

For those who will be attending the SEALS Conference and are interested in crowdfunding, my co-blogger Joan Heminway is moderating a discussion group on "The Legal Aspects of Small Business Finance in the Crowdfunding Era" on Tuesday, August 9 from 9am-12pm, which promises to be interesting. Most of the Olympic athletes appear to be using gift-based crowdfunding, but in the SEALS discussion group, I will present on a proposal for firms to use equity crowdfunding in connection with building athletic communities that could include Olympic athletes.

Drinker Biddle's Analysis of the First 50 Crowdfunding Offerings

Robert Esposito (Drinker Biddle) passed along his firm's interesting report on early crowdfunding offerings. The report is available here. Be sure to download the firm level detail spreadsheet available via the data download on the top right of the page.  

The report shows that social enterprise and breweries/distilleries account for outsized portions of the early offerings. A group of us (including co-blogger Joan Heminway) predicted, at the University of Colorado's business school in July 2013, that social entrepreneurs would gravitate to equity crowdfunding. Separately, in my social enterprise law seminar, I was surprised by how many students presented on breweries that were social enterprises, and looking at this list it appears that there is at least one company (Hawaiian Ola Brewing Corporation - a Certified B Corporation) that falls into both the social enterprise and brewery categories highlighted below. It may be that both areas appeal to younger entrepreneurs who may also be eager to try this new form of capital raising. 

Go read the entire report, but I provide a teaser quote below the dotted line with some emphasis added.

--------------------

In general. As of June 30, 2016, 50 companies have filed a Form C with the SEC to offer securities under the Regulation Crowdfunding exemption. Minimum target offering amounts range from $20,000 to $500,000 per offering, with a median of $55,000. All but one of these issuers, however, have disclosed that they will accept offers in excess of the target amount, including 27 issuers that say they will accept investments at or near the maximum permitted offering amount of $1,000,000.  In contrast, 18 of the first 50 issuers elected to cap their offering at just $100,000, with the remainder setting an offering cap of between $200,000 and $500,000.  In the aggregate, if this first wave of retail crowdfundings is successful, 50 small companies will raise an aggregate of $6 to $30 million in new capital to fund their businesses. 

While announced offering durations range from 21 days to one year, the median period that issuers say they will keep their offerings open is just under six months, with about half electing an offering duration between 166 and 182 days.

Eighteen different jurisdictions of incorporation are represented among the first 50 issuers; however, nearly half of the initial filers (24) are Delaware entities. Early data shows that issuers tend to be early-stage startups, with a median issuer age of just 354 days. Nevertheless, nine of the issuers were more than five years old, and the oldest was incorporated in 2003. . . . 

While a total of 12 funding portals have registered with FINRA to date, the early mover Wefunder portal hosts more than half (26) of the first 50 offerings. The StartEngine portal has secured eight offerings, with the remainder split among other portals, including SeedInvest, Next Seed, Flashfunders, and Venture.co. 

Early Adopters.

• Social Enterprises. According to the Global Entrepreneurship Monitor’s Special Topic Report on Social Entrepreneurship, social enterprises account for only 5.7 percent of entrepreneurial activity in the United States. However, early crowdfunding data shows that social enterprises are strongly represented among crowdfunding issuers. Seven issuers, representing 14 percent of the first 50 offerings, are either registered as benefit corporations or benefit LLCs, or are certified by B Lab as B Corps, and at least an additional nine issuers operate within traditional corporate forms with strong social and/or environmental missions. Combined, these issuers represent 32 percent of the first 50 offerings.
   
• Raise a Glass. Craft breweries, distilleries, and licensed establishments are also disproportionately represented among the first 50 issuers. Eight issuers, representing 16 percent of the first 50 offerings, fall into this category, including 2 distilleries, 2 craft breweries, 2 bars, as well as a frozen alcohol producer and a producer of ginger liqueur. 

The White House and Title III of the JOBS Act: Good Marketing or Overoptimism?

A colleague sent me a link to a White House blog post focusing on Title III of the Jumpstart Our Business Startups Act (JOBS Act), known as the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (CROWDFUND Act).  The main theme of the blog post, entitled The Promise of Crowdfunding and American Innovation, is stated in its summary: ''Crowdfunding' rule makes it possible for entrepreneurs across the country to raise small-dollar investments from ordinary Americans."  This much is true.  And the post accurately notes that "previous forms of crowdfunding" also already did this.

But the post goes on to extol the virtues of the CROWDFUND Act, which offers (among other things) a registration exemption for investment (or securities) crowdfunding--a very special type of crowdfunding involving the offer or sale of debt, equity, investment contracts, or other securities.  Or at least the blog post tries to extol the virtues of the CROWDFUND Act.  I am not buying it.  In fact, the post doesn't come up with much of substance to praise . . . .

The coauthors focus a key paragraph on explaining why the CROWDFUND Act is heavy on investor protection provisions.  But they do not talk about the costs of the legislation in relation to its potential benefits, except in the most superficial way--mentioning "risks" without classifying them and outlining the "multiple layers of investor protections."  Although it was written before the final Securities and Exchange Commission rules were adopted under the CROWDFUND Act, my article for the Kentucky Law Journal offers a more detailed picture of benefits and costs and shares my view that the costs are likely to outweigh the benefits for many market participants.

Maybe sensing this (and the possible lack of success of the CROWDFUND Act that may result from this imbalance), the coauthors of the White House blog post offer the following:

One encouraging recent sign is not only the launch of many new regulated crowdfunding platforms, but also the growing ecosystem of “startups helping startups” to provide services for this new marketplace—making it easier for entrepreneurs to fulfill disclosure requirements, verify investor credentials, educate investors, and more. Over time, these new tools may increase transparency and provide strong accountability not only for “the crowd,” but also for the “family and friends” that have long served as entrepreneurs’ first source of seed capital. 

This is a super effect of crowdfunding generally and of securities crowdfunding under the CROWDFUND Act specifically--the emergence of new services and market participants  to support crowdfunding and small capital raising more generally.  I predicted this in my first article on crowdfunding (co-authored with one of my former students) : "Because '[c]rowdfunding is a market of and for the participants,' some traditional financial intermediaries may be shut out of this sector of the capital formation process.  No doubt, however, new support roles for crowdfunding will develop as the industry matures."  [(p. 930, n.263) (citations omitted)]  But these market innovations would be more pronounced, imv, if the CROWDFUND Act provided participants with a more balanced set of costs for the benefits provided.  As the blog post notes, "it’s still a fact that not every entrepreneur has access to needed capital."  More can be done to solve this problem with a registration exemption that allows for small capital raising--funding at well less than the $1 million level set under the CROWDFUND Act--at less cost.

The blog post concludes with more platitudes.  ("America’s entrepreneurs are our engines of economic growth, innovation, and job creation . . . .")  Really, this blog post is a bit of a puff piece--manifesting both good marketing (for those who read and believe it) and overoptimism. 

But then again, what did I expect from a blog post put out by White House staff?  I suppose, given the President's support for the CROWDFUND Act (and the JOBS Act overall--which the coauthors also praise more generally in a paragraph of the post), I should expect the White House to promote the use of the CROWDFUND Act through these kinds of public relations messages.  OK.  I get that.  Nevertheless, I admit to being disappointed that more is not being done in the Executive Branch and elsewhere to point out the shortcomings of the CROWDFUND Act and fine tune the regulation of securities crowdfunding so that it can have its maximum positive impact on business and project innovators and investors alike.  Instead, I fear that well intending proponents are over-promoting the CROWDFUND Act, which may ultimately sour folks on securities crowdfunding as a capital raising alternative if few are able to take advantage of the current regulatory exemptions.  We'll see.  I hope I am wrong in worrying about this.  Time will tell.