ISSUES

This Article examines the first wave of crowdfunding investment contracts that were offered in the U.S. during the first month after crowdfunding investment became legal in May 2016. Assessing the earliest possible data sample of crowdfunding investment contracts is particularly important because crowdfunding investment platforms create influential path dependencies that drive start-up companies to use the standardized contract templates that the platforms promote. This paper provides a basis, grounded in actual crowdfunding investment contracts, for recommending improvements to the agreements that govern the emerging field of crowdfunding investments while also establishing a baseline from which to measure future evolution of crowdfunding investment contracting practices. 

Initial crowdfunding investment offerings include contracts for six distinct types of investments: common stock, preferred stock, interest-bearing loans, revenue-sharing arrangements, convertible debt, and future equity. In addition, many of the initial crowdfunding investment offerings also include a rewards component, in the style of Kickstarter crowdfunding campaigns. 

This Article’s analysis of each type of crowdfunding investment contract leads to four primary observations. First, crowdfunding investors may garner more practical protections from their collective leverage through social media than from formal contract rights. Second, crowdfunding investment intermediaries (i.e., websites known as funding portals) profoundly influence crowdfunding contracting practices by forging the standardized channels through which crowdfunding investments flow. Third, in the initial set of crowdfunding investment contracts, debt securities were significantly less likely to be offered than equity securities, and hybrid revenue-sharing securities were even less common, even though debt and revenue-sharing securities are well-suited for stable businesses with positive cash flows that seek investments from the crowd. Fourth, two new forms of simplified contracts—the “SAFE” and the “KISS,” which are specially tailored for crowdfunding investment offerings with high-growth potential—hold great promise, though not without drawbacks, for efficiently providing crowdfunding investors with the types of protections that venture capitalists typically demand when investing in seed-stage start-up companies. 


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