The Digital Shareholder

Crowdfunding, a new Internet-based securities market, was recently authorized by federal and state law in order to create a vibrant, diverse, and inclusive system of entrepreneurial finance. But will people really send their money to strangers on the Internet in exchange for unregistered securities in speculative startups? Many are doubtful, but this Article looks to first principles and finds reason for optimism. Well-established theory teaches that all forms of startup finance must confront and overcome three fundamental challenges: uncertainty, information asymmetry, and agency costs. This Article systematically examines this “trio of problems” and potential solutions in the context of crowdfunding. It begins by considering whether known solutions used in traditional forms of entrepreneurial finance — venture capital, angel investing, and public companies — can be borrowed by crowdfunding. Unfortunately, these methods, especially the most powerful among them, will not translate well to crowdfunding. Finding traditional solutions inert, this Article presents five novel solutions that respond directly to crowdfunding’s distinctive digital context: (1) wisdom of the crowd; (2) crowdsourced investment analysis; (3) online reputation; (4) securities-based compensation; and (5) digital monitoring. Collectively, these solutions provide a sound basis for crowdfunding to overcome the three fundamental challenges and fulfill its compelling vision

Crowdfunding Issuers in the United States

Equity crowdfunding allows startup companies to sell shares of stock, bonds or other securities to the public using online capital markets. This allows entrepreneurs to avoid the costly process of a traditional IPO. Equity crowdfunding started in America in May 2016. This article explores the types of companies that utilize equity crowdfunding, and finds that most issuers are early-stage companies; most are corporations; there is significant geographic diversity amongst the issuers, and twenty-eight percent of issuers are female-founded or female led, which is much higher than in venture capital or angel investing

Crowdfunding Securities

A new federal statute authorizes the online crowdfunding of securities, a new idea based on the concept of reward crowdfunding practiced on Kickstarter and other websites. This method of selling securities had previously been banned by federal securities law but the new CROWDFUND Act overturns that prohibition. This Article introduces the CROWDFUND Act and explains that it can be expected to have two primary effects on securities law and capital markets. First, it will liberate startup companies to use peer networks and the Internet to obtain modest amounts of capital at low cost. Second, it will help democratize the market for financing speculative startup companies and allow investors of modest means to make investments that had previously been offered solely to wealthy, so-called accredited investors. This Article also offers two predictions as to how securities crowdfunding will play out in practice. First, it predicts that companies that sell equity via crowdfunding may find themselves the subject of hostile takeovers (though the founders of such companies can easily avoid that outcome if they act with a little foresight). Second, it predicts that issuers may prefer to crowdfund debt securities, such as bonds, rather than equity. The Article concludes with a few thoughts on the SEC\u27s implementation of the Act in light of the potential for fraud

A Standard Clause Analysis of the Frustration Doctrine and the Material Adverse Change Clause

In the darkest depths of a corporate merger agreement lies the MAC clause, a term that permits the acquirer to walk away from a transaction if, between signing and closing, the target company experiences a Material Adverse Change. Multibillion-dollar deals rise or fall based on the anticipated interpretation of a MAC clause, and invocation of the clause in a sensitive transaction could trigger the collapse of the global financial system. In short, the MAC clause is the most important contract term of our time. And yet--due to an almost total lack of case law--no one knows what it means. In this Article I explain the MAC clause using a new conceptual tool for drafting and interpreting contracts, the standard clause analysis. For any default rule of contract law, practitioners can be expected to develop a standard clause analog in order to easily contract around the default. Given this relationship between default rules and their standard clause analogs, if one is given, the other can be deduced. This is the standard clause analysis, and it can be used in two ways, which I call forward and reverse. In a forward standard clause analysis, one begins with a default rule and advances to its standard clause analog. The forward standard clause analysis can be used to predict the existence of standard clause analogs that have yet to be observed. And in a reverse standard clause analysis, one begins with a standard clause and advances to the default rule with which it is associated. The reverse analysis is a powerful method for interpreting contract terms. After introducing and describing the standard clause analysis, I put it to practical use. I begin by applying the forward analysis to the common law doctrine of frustration, and predict that a frustration clause exists, or will soon come into being, and that it would resemble a reverse Force Majeure clause and be found in relatively high-value contracts. These predictions are then confirmed with several examples of frustration clauses observed in the real world: the Morals clause, the Walkaway clause, and, most notably, the MAC clause. Then I apply the reverse analysis to the MAC clause and show it to be a standard clause analog of the frustration doctrine that alters the default rule by (a) permitting excuse on the basis of a significant (but less than total) loss in contractual value, (b) excusing the acquirer based on frustration of a secondary (as opposed to its primary ) purpose, and (c) shifting major exogenous risks (such as an economic recession or a natural disaster) from the target to the acquirer. I conclude with a case study to demonstrate the difference between the MAC clause and the default frustration doctrine: Bank of America\u27s recent $50 billion acquisition of Merrill Lynch in late 2008. During the brief three-month period between signing and closing, Merrill lost an astounding$15 billion, but the conventional wisdom--shared by Federal Reserve Chairman Ben Bernanke, among others--is that Merrill\u27s loss clearly failed to trigger the MAC clause. I disagree. While the default frustration doctrine would not have offered any relief, Bank of America may well have had viable grounds to invoke the MAC clause, properly understood, and walk away from the Merrill deal

Arbitration and the Contract Exchange

A contract exchange, defined as an organized marketplace for the creation or trading of specific contracts, provides benefits to its members as well as the public at large. But legal disputes can arise on contract exchanges, just as they do anywhere else, and those disputes can be litigated, mediated, arbitrated, or resolved in some other way. This Essay claims that arbitration, rather than litigation, is a particularly useful and appropriate means for resolving exchange-related disputes, and that this is true not only for traditional contract exchanges, like the Chicago Board of Trade, but also for online consumer contract exchanges, such as Priceline.com. In support of this claim, this essay shows that the vast majority of disputes arising out of American commodities exchanges are resolved through arbitration, not litigation. The nature of arbitration requires that judicial review of an arbitrator\u27s decision be minimal, and it is under current law. But that does not mean that the state plays no role in contract-exchange disputes. To the contrary, the Commodities Futures Trading Commission and other government agencies regulate exchange arbitration to ensure that the process is sufficiently robust to be relied upon for just results. This regulation of contract exchange arbitration enhances the respect that courts will pay to the regulated arbitration clause, process, and decisions. The foundation for this enhanced respect is that the ex ante (regulatory) review acts as a substitute for ex post (judicial) review of exchange-related arbitration. In recent years, however, the Federal Arbitration Act has been read by the Supreme Court to mandate a high level of judicial respect for arbitration and arbitration clauses regardless of whether there was ex ante regulatory approval. Given the other significant costs of regulatory oversight, especially for a nascent and growing industry like consumer contract exchanges, it may be wise to rely solely on the FAA to protect exchange-related arbitration

Quarterback by Committee: A Response in Memory of Dan Markel

In Catalyzing Fans, Dan Markel, Michael McCann and Howard Wasserman propose so-called “Fan Action Committees” (“FACs”), whereby fans would crowdfund a sum of money and then spend it to influence the personnel decisions of their favorite teams. This Response — dedicated to the memory of Dan Markel — suggests that an effective FAC could upset a team’s overall hiring and compensation system, thereby risking a downturn in team performance to the detriment of all concerned

The Patent Office Meets the Poison Pill: Why Legal Methods Cannot Be Patented

In 2003, for the first time in its 170-year history, the United States Patent Office began awarding patents for novel legal innovations, in addition to traditional inventions such as the telephone or airplane. Commentators have accepted the Patent Office\u27s power to grant legal method patents, but at the same time have criticized this new type of patent on policy grounds. But no one has suggested that the Patent Office exceeded its authority by awarding patents for legal methods, until now. In the Patent Act of 1952, which is still in effect today, Congress established certain requirements for patentability, including a requirement that only inventions may be patented. The term invention, in turn, has been construed by the Supreme Court to mean anything made by man that utilizes or harnesses a law of nature (such as gravity, thermodynamics or calculus) for human benefit. A watermill, for instance, harnesses the power of gravity to run machinery; an airplane exploits certain laws of fluid dynamics to achieve lift. But legal methods are not inventions in this sense, because they employ or exploit laws of man - not laws of nature - to produce a useful result. Hence, legal methods are excluded from patentability by the Patent Act and the Patent Office has overstepped its authority by awarding patents therefor