Crowdfunding and an Innovator’s Access to Capital
In recent years the question has arisen of whether the Internet can be used by entrepreneurs to facilitate the fund-raising process for innovators. There is no doubt that, as a technological matter, the Internet provides an alternative communications and promotion medium that can be used to reach potential investors. The challenge presented by the use of the Internet is not technological, but regulatory. Can the Internet be used in a way that is compatible with the requirements of the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act ("Exchange Act") of 1934? The answer provided by Congress in the Jumpstart Our Business Startups Act ("JOBS Act"), passed in April 2012, is that it can, but only subject to complex and extensive regulatory restrictions. Previously, I argued that the patent system not only creates incentives for innovation but also lowers transaction costs by making it easier for innovators to contract in relation to their innovation. Innovators need access to many different resources to turn their innovation into a commercial product. Whereas the earlier work applied a broad-brush, top-down approach, this Essay takes the opposite approach by looking at the legal and regulatory barriers that affect the innovator's access to one vital resource: money. It is a common strategy for independent innovators to first patent their innovation, to transfer ownership of that patent to a corporation, and then to sell debt or equity securities issued by that corporation to investors. The stereotypical venture capital sequence is to sell first to angel investors and then, as progress is made toward commercialization, to venture capital funds and, eventually, to the public.