With the advent of equity crowdfunding, a Tennessee University Law Professor Joan MacLeod Hemingway suggests it may be time to rethink the structure of financial and financially regulation in the United States and to look at the bigger picture of how crowdfunding and other hybrid investment properly fits into a reformed, regulatory scheme.
In an article entitled “What is a Security in the Crowdfund Era,” published on February 1, 2013 by the Ohio State Entrepreneurial Business Law Journal, Prof. Hemingway believes the U.S. regulatory system needs to be simplified and moved away from a functional regulatory structure towards one that regulates based on the risks posed by the products, services, or firms. “The complexity and costs of the current structure encouraged firms to seek ways to avoid it.”
Prof. Hemingway places crowdfunding into five categories: (1) donation model, (2) reward model, (3) pre-purchase model, (4) lending model and (5) equity model. “Some look more like charitable or other non-profit contributions, some may seem akin to gambling bets and some resemble traditional equity and debt interests,” she wrote. Some models, such as a contract in which an investor is entitled to a profit share or revenue share for a short term, may not be classifiable as security. Plus, there may be psychological motivations by users to invest in a project that may offer no profit motive. Prof. Hemingway believes such factors should be considered and taken into account when structuring a reformed regulatory model.