Crowdfunding was designed as an alternative regime to traditional securities regulation to help small businesses access capital. One problem with this new regime is that crowdfunding rules ignore the special characteristics of crowds. Crowds rely on group heuristics like the “wisdom of the crowd” and are subject to group inefficiencies like information cascades. Treating crowdfunding like traditional fundraising ignores how crowds behave and may impede or even prevent efficient crowd behavior from occurring.
This Essay explores how “Digital Shareholders” operate in the online equity-crowdfunding market, which illuminates how regulations could be revised to prevent market failures. Crowdfunding regulations may create a “Market for Lemons,” where investment opportunities on offer to Digital Shareholders, are categorically inferior to investments on offer to professional investors through traditional securities regulations. But this Article argues that Digital Shareholders are so distinct from professional investors that the market for crowdfunding and the market for professional investments are in fact separate markets. Therefore, crowdfunding rules and regulations should be designed to leverage the special abilities of Digital Shareholders to create a distinct Equity Crowdfunding marketplace and mitigate the lemons problem.