Document Type

Article

Publication Date

2019

Keywords

Regulation Crowdfunding, digital tokens, blockchain, capital formation, safe harbor exemptions, innovation, securities offerings, investment crowdfunding

Abstract

Less than three years ago, the Securities and Exchange Commission (“SEC”) adopted investment crowdfunding regulations (“Reg. CF”) to facilitate small companies’ efforts to raise capital and jumpstart employment, providing companies potentially one of the most disruptive transformations in capital markets.

As the lion share of securities are offered under public offerings or Reg. D safe harbor exemptions, outcomes and impacts of Reg. CF offerings are not studied or monitored to the same extent. One line of inquiry is the scope of Reg. CF, including questions about the level of company participation, the types of businesses seeking capital formation, and the quality of the investments offered. This article seeks to answer to what extent Reg. CF investment crowdfunding has facilitated company capital formation and provided a means for investors to purchase suitable investments. Towards that end, the author retrieved data from SEC Form C notice filings and other SEC filings completed by companies beginning with Reg. CF’s adoption date through June 30, 2018. To illustrate the findings, this article proceeds in five succeeding substantive parts:

PART II provides a brief history of the Reg. CF exemption law and the research findings about investment crowdfunding, generally and digital tokens, more specifically;

PART III provides insights of the current state of offering blockchain based digital tokens to unsophisticated investors and the silver linings in the data;

PART IV provides recommendations towards a path forward in Reg. CF. First, the SEC should re-evaluate its regulatory policy in light of the proliferation of blockchain based token offerings, gaps in funding portals and provide additional warnings to unsophisticated investors who may be taking on enhanced investment risk. The uncertainty and risk of digital tokens reliant on blockchain technology foretells a troubling high risk of investment loss, which may be in addition to the expected high risk of loss for startup tech companies. Second, companies, particularly idealistic tech startups, that are considering the offer of digital tokens, should thoughtfully consider alternatives to these offerings. There remains a level of uncertainty and risk in these offerings, which could result in greater risk and liability than the alternative financing available to them. Last, economic development organizations should consider developing their role in attracting, designing and implementing funding portals to provide the support that tech and other startup companies need to raise capital for their business;

PART V provides concluding remarks.

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