Ghosting the Crowd

Crowdfunded companies are legally bound to provide investors with an annual report—but most don’t. This “ghosting of the crowd” violates federal securities laws and raises the risk of opportunism by entrepreneurs, who are more prone to misbehave if no one is watching. Most ominously, it threatens the very viability of the investment crowdfunding market, as investors who are ghosted by one company are less likely to invest in another. This Article reports on the embarrassing record of noncompliance with the annual report rule imposed by the Jumpstart Our Business Startups (“JOBS”) Act of 2012 and Regulation Crowdfunding, and proposes a simple solution: Crowdfunding platforms should withhold one percent of the capital raised by an issuer and only release it once the company files its first annual report. Due to competitive pressure, however, any given crowdfunding platform is unlikely to impose such a rule on its own; Securities and Exchange Commission (“SEC”) action is needed.

This Article accordingly concludes with a proposed regulation readymade for the SEC to adopt.