Martin Edwards
ABSTRACT
Equity crowdfunding is a financial innovation that allows small businesses and startups to access capital through soliciting investment over the Internet. The current literature on crowdfunding has focused on its theoretical background and on the development of crowdfunding exemptions from the securities laws permitting the practice. There is less discussion of the impact of crowdfunding on corporate governance. This article fills that gap by outlining the potential for a panoply of intracorporate disputes between and among majority shareholders and “crowd” minority shareholders, placing the discussion within the longstanding—if uneasy—divide in judicial treatment of disputes in public corporations and close corporations. From there, the article argues that courts adjudicating disputes in “close-but-crowdfunded” firms should adopt the contractual approach exemplified by Delaware law, and refrain from importing minority shareholder oppression doctrine into the crowdfunding context. The two primary justifications for providing special protections for close corporation minority shareholders are much weaker in the crowdfunding context. First, the mechanics of the crowdfunding process create both the incentive and opportunity to select appropriate terms upon which the founders will continue their relationship and which will be offered to the crowd. Second, and similarly, that same process undermines the inference that there are unwritten, yet reasonable, expectations about any shareholder’s role in the venture. Furthermore, the application of oppression doctrine in the crowdfunded firm would ultimately harm crowd and non-crowd shareholders alike, while undermining the potential gains from equity crowdfunding as a new source of capital accumulation.