Big Dirty Money

A blog on business law, politics, and white collar crime

February 13, 2017

New Hopes and Hazards for Social Investment Crowfunding

Happy to be included in Law and Policy for a New Economy: Sustainable, Just, and Democratic, edited by Melissa K. Scanlan, forthcoming in 2017.

What follows is an excerpt from my chapter on “New Hopes and Hazards for Social Investment Crowdfunding.”

In his chapter on the “Joyful Economy,” (Chapter 2), Gus Speth contends that building a new economy requires a redefinition of the corporation and its goals. He advocates for shifting it from an enterprise designed primarily to provide profits for shareholders to one concerned about a broader set of values and stakeholders. To develop what he deems a joyful economy, he suggests that people, place and planet must be prioritized. Perhaps those who bring leadership to businesses that focus on social and environmental concerns–––social entrepreneurs–––can answer the call by reorienting the corporations that they create. Such localized efforts to transform individual firms could inspire widespread change.

The timing is good for such a transition, as social entrepreneurs have promising new options available for widely soliciting like-minded investors and organizing their business enterprises to include social goals. Yet, due to distrust of the existing system, some may not explore these opportunities. Not attuned to mainstream matters, they may be unaware of the recent legal changes that make it easier for them to engage within the existing financial and corporate governance systems to fund their enterprises and to organize them with a social or environmental mission in mind.


These recent legal developments are significant. Now in the US, those seeking to fund an enterprise using securities offerings can forgo a complex, time-consuming full federal registration process with the Securities and Exchange Commission (SEC) while still reaching out to solicit a wide group of potential investors. This general solicitation can take place in a variety of media include advertising online through crowdfunding portals and other platforms. The ability to bypass the full SEC registration process is the result of recent legal reforms that streamline how businesses can raise money through the offering and sale of securities. These legal reforms impact social entrepreneurs because the law covers the methods they might use to attract funding. Unlike a donation made through a site like Kickstarter or Go Fund Me, which is not subject to the securities laws, investments made with an expectation of profit typically are subject to securities regulation at the federal or state levels (or both). This is because as a matter of law, securities include investments of money in a common enterprise with the expectation of profit as well as more common financial instruments like stocks and bonds.


Taken together, these federal and state legal and regulatory updates make it easier for startups, including socially or environmentally-focused enterprises to raise capital and for members of the general public to channel their savings into such investments. These changes can provide space for those social entrepreneurs who believe they do not fit within the current system.


]With these hopeful legal developments, however, come hazards. The usual concerns around fraud and mismanagement endure. Moreover, less sophisticated members of the public may not have the skills to assess the investment opportunities. And, they may not fully understand that the majority of startups fail and may invest more in individual startups or even in a diversified portfolio than they can stand to lose. Streamlining the offering process and eliminating traditional federal registration and disclosure requirements may result in investors not obtaining information essential to their investment decisions. These streamlined offering processes may also attract the unscrupulous and reckless issuers seeking a quick buck without sufficient skill or realistic business plans. Indeed, in some cases, given the combination of the perceived virtue of or affinity with a local and mission-driven enterprises and unsophisticated investors, fraud could be even more prevalent.

In the wake of the financial meltdown in 2008, there were many who claimed it had been inevitable, that “no one saw it coming,” and that subprime borrowers were to blame.