DUQUESNE UNIVERSITY
       SCHOOL OF LAW LEGAL STUDIES RESEARCH PAPER SERIES




 Hyper --- unding: Regulating
  Financial Innovations
            Seth C. Oranburg
         Assistant Pro --- essor o ---  Law
                             2018

 Duquesne University School o ---  Law Research Paper
                   No. 2018-12

  Originally published in: COLORADO LAW REVIEW




  Electronic copy available at: https://ssrn.com/abstract=2982554

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                        UNIVERSITY OF

 COLORADO LAW REVIEW    Volume 89, Issue 4                                               2018


      HYPERFUNDING: REGULATING
        FINANCIAL INNOVATIONS
                         SETH C. ORANBURG*

 Innovations in corporate  --- inance are driven by  --- rustrations
 with present regulations and  --- ueled by the internet and
 social media. Hyper --- unding is one such example: Tesla
 paved the way  --- or an electric vehicle revolution by preselling
 hundreds o ---  thousands o ---  its Model 3 EV direct to
 consumers. Unwary consumers may not have realized that
 they were underwriting Tesla’s bold strategy to trans --- orm
 multiple product markets. Risks were not disclosed. Rewards
 proved illusory. Investors would have been entitled to
 disclosures and colorable claims o ---

raud when Tesla missed milestones and deadlines. But consumers can only get their $1000 deposit back, without interest, i — Tesla has the

inancial and reputational capital to re — und consumers. What happens when an undercapitalized or — raudulent — irm uses the same technique and — ails to deliver? Are cryptocurrency promoters and “initial coin o —

erings” already Hyper — unding, pumping, and dumping vaporware? This Article explores challenges with regulating novel techniques in corporate — inance and discusses an initial — ramework — or

• Assistant Pro

  essor, Duquesne University School o — Law; Fellow and Program

A

iliate Scholar, New York University School o — Law. Thanks to the John Templeton Foundation — or their generous grant, which — unded this research; to my commentators, Steven Baicker-McKee, Josh Blackman, Vince Buccola, Mihalis Diamantis, John Golden, John Harrison, Joshua Klein — eld, Jake Lin — ord, Paul Mahoney, Irina Manta, Jenni — er Mascott, John McGinnis, Robert Miller, Jane Moriarty, John P — a —

, Jacob Rooksby, Andrew Schwartz, Erin Shenley, and James Stern; and to my research assistants, Christian Hakim, Elizabeth Mylin, Benjamin Jackson, and Talia Alicia DeFrancesco.

 Electronic copy available at: https://ssrn.com/abstract=2982554

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1034 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

  protecting investors while promoting innovation.

INTRODUCTION……………………………………………………………… 1034 I. INNOVATIONS IN FUNDRAISING ………………………………… 1039 A. Hyper — unding………………………………………………….. 1039 B. Elon Musk and Henry Ford ……………………………… 1041 C. Financial Regulatory Theory ……………………………. 1044 D. Tesla’s Reservation Agreement………………………….. 1047 E. Hype or Funding? ……………………………………………. 1050 II. A MARKET FOR ELECTRIC VEHICLES ………………………… 1055 A. Multi-Sided Market Problems ………………………….. 1056 B. Hyper — unding Solutions …………………………………… 1063 III. HYPERFUNDING LAW & FINANCE …………………………….. 1069 A. Securities………………………………………………………… 1072 1. Pre — erred Stock ………………………………………….. 1072 2. Investment Contracts …………………………………. 1075 B. Crowd — unding …………………………………………………. 1078 C. Presales ………………………………………………………….. 1082 1. Interstate Land Sales …………………………………. 1084 2. Ponzi Schemes …………………………………………… 1086 3. Bankruptcy Protections ……………………………… 1088 4. Fair Credit Billing Act Protections………………. 1089 D. Initial Coin O —

erings ………………………………………. 1090 CONCLUSION ………………………………………………………………… 1093

INTRODUCTION

Tesla, Inc. raised almost $400,000,000 by selling cars that do not exist.1 From a regulatory perspective, this unprecedented “presale” does not exist.2 There is no law designed to govern such activities because they have never occurred be --- ore.3 But this is hardly the  --- irst experiment in creative corporate  --- inance. From the invention o ---  pre --- erred stock that  --- inanced railways in the 1870s4 to the deployment o ---



1. Fred Lambert, Tesla Has 373,000 Model 3 Reservations as o ---  May 15, A --- ter 8k Cancellations and 4k Duplicates, ELECTREK (May 18, 2016, 5:05 PM), https://electrek.co/2016/05/18/tesla-model-3-reservations-cancellations-duplicates/ [https://perma.cc/P9CT-5YTX].
2. See in --- ra Part III.
3. Id.
4. William N. Goetzmann & Andrey Ukhov, British Investment Overseas 1870-1913: A Modern Port --- olio Theory Approach (Nat’l Bureau o ---  Econ. Working Paper No. 11266, 2005) http://scholarship.sha.cornell.edu/articles/369 [https://




  Electronic copy available at: https://ssrn.com/abstract=2982554

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2018] HYPERFUNDING 1035

collateralized debt obligations that trans

ormed sub-prime mortgages into top-rated securities sold through 2007,5 and now, initial coin o —

erings (ICOs) on cryptocurrency blockchains,6 regulators are constantly con — ronted and con — ounded by new — inancial products. We are entering an era when innovation outpaces regulation.7 In this brave new world, private consumers will become increasingly responsible — or their own — inancial security. Public watchdogs and legislatures lack the capacity to keep up with emerging FinTech8 like blockchain9 and cryptocurrency.10 This Article — ocuses on one such — inancial innovation, which has not been previously discussed in the legal literature, uses it as a case study to demonstrate challenges with regulating novel — inancial instruments, and sets — orth an initial — ramework — or consumer and retail-investor protection in an era o — diminishing regulatory capacity. “Hyper — unding” is — undraising many millions o — dollars in a

perma.cc/TF8C-JGGA]. 5. FIN. CRISIS INQUIRY COMM’N, THE FINANCIAL CRISIS INQUIRY REPORT 127 (2011), https://www.gpo.gov/ — dsys/pkg/GPO-FCIC/pd — /GPO-FCIC.pd — [https:// perma.cc/35AV-9X3Z]. 6. Public Statement, Chairman Jay Clayton, U.S. Sec. & Exch. Comm’n, Statement o — Cryptocurrencies and Initial Coin O —

erings (Dec. 11, 2017) https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 [https://perma.cc/TQZ6-WBCE]. 7. See Jeremy Kidd, Fintech: Antidote to Rent-Seeking?, 92 CHI. KENT L.R. 165 (2018). 8. FinTech is a “technologically enabled — inancial innovation. It is giving rise to new business models, applications, processes and products. These could have a material e —

ect on — inancial markets and institutions and the provision o —

inancial services.” FIN. STABILITY BD., FINANCIAL STABILITY IMPLICATIONS FROM FINTECH (2017), http://www. — sb.org/wp-content/uploads/R270617.pd — [https://perma.cc/ SD6J-DQBQ]. 9. See François R. Velde, Bitcoin: A Primer, CHI. FED. LETTER, no. 317, Dec. 2013, at 2–3 https://www.chicago — ed.org/publications/chicago- — ed-letter/2013/ december-317 [https://perma.cc/D23E-UN5Q] (explaining that blockchain is a continuously growing list o — records, called blocks, which are linked and secured using cryptography that is published in an open, distributed ledger that can record transactions between two parties e —

iciently and in a veri — iable and permanent way).

1. Sarah Jane Hughes & Stephen T. Middlebrook, Advancing a Framework

or Regulating Cryptocurrency Payments Intermediaries, 32 YALE J. REG. 495, 504–05 (2015) (“A subset o — virtual currency is ‘cryptocurrency,’ by which we mean an internet-based virtual currency in which the ownership o — a particular unit o —

value is validated using cryptography. Cryptocurrencies are not legal tender and, thus, their use requires the consent o — both parties to a transaction. They are not denominated in or backed by gold or silver. Economists call currencies backed by precious metals and the like ‘commodity-based currencies.’”).

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1036 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

brie

campaign that directly targets a broad base o — consumers or investors via the internet.11 I call such activities “Hyper — unding” because o — the high speed at which capital is raised and as an homage to Elon Musk, CEO and Founder o —

Tesla12 and progenitor o

the Hyperloop.13 This term also captures the zeitgeist o — the era o — accelerated — inancial innovation. Hyper — unding is not equity — inancing because it does not meet the Howey test,14 so it is not regulated by securities laws.15 Hyper — unding is not crowd — unding because it does not use an intermediary or portal to indirectly raise — unds, so it is not regulated by crowd — unding laws either.16 Hyper — unding is several orders o — magnitude larger and more uncertain than a traditional presale program, so o —

-the-shel — consumer protection rules are insu —

icient.17 While it is not directly analogous to any well-established — inancial instruments or technique, Hyper — unding is remarkably similar to other new

inancing devices such as Initial Coin O —

erings (ICOs), which are also virtually unregulated.18 This Article proceeds as — ollows: In Part I, this Article contributes to the literature on corporate — inance by making the — irst e —

ort to classi — y a new category in — undraising. It uses Tesla’s incredible and unprecedented Model 3 “presale” as a case study situated in its historical, technological, and regulatory context. This event was remarkable because, in one week, Tesla, Inc. presold almost 400,000 to-be-developed Model 3 electric vehicles (EVs), projecting almost $20 billion in net

1. See in

   ra Part I.A.

2. Elon Musk is the co-

   ounder, CEO, and Product Architect at Tesla, overseeing all product development, engineering, and design o — the company’s electric vehicles, battery products, and solar roo — s. See Elon Musk, TESLA, https://www.tesla.com/elon-musk (last visited Feb. 19, 2018) [https://perma.cc/ H557-85QJ].

3. Danielle Muoio, Everything We Know About Elon Musk’s Ambitious Hyperloop Plan, BUS. INSIDER (Aug. 17, 2017), http://www.businessinsider.com/ elon-musk-hyperloop-plan-boring-company-2017-8 [https://perma.cc/CN4A-GZR5].
4. See SEC v. W.J. Howey Co., 328 U.S. 293, 299–300 (1946) (outlining a

our-part test — or determining an investment contract: an investment o — money, with the expectation o — pro — it, in common enterprise, and the pro — its to come solely

rom the e —

orts o — others).

1. See in

   ra Section III.A.

2. See in

   ra Section III.B.

3. See in

   ra Section III.C.

4. See in

   ra Section III.D.

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2018] HYPERFUNDING 1037

sales.19 In contrast, the Camry is America’s best-selling car,20 and throughout all o — 2015, Toyota sold only 429,355 Camry automobiles, — or roughly $9.5 billion in total.21 Part I argues that Tesla deployed an innovative corporate — inance strategy— Hyper — unding—to pre-sell about as many — uturistic Model 3 EVs in one week as the amount o — Camrys actually sold by Toyota in one year. In Part II, this Article contributes to the business literature by being the — irst to suggest that Hyper — unding was introduced to solve a two-sided market problem. Tesla needed to simultaneously sell EVs to consumers and to convince investors and third parties to build EV charging stations. Tesla solved this “chicken-and-egg” problem by collecting $1,000 “re — undable reservations” — or this — uture vehicle.22 This simultaneously proved demand and provided working capital. Part II argues that Hyper — unding is a — inancial technique that could be used to solve other two-sided market problems. In Part III, this Article contributes to the regulatory literature by developing a — ramework — or analyzing whether and how Hyper — unding and similar — inancial innovations may be regulated. Securities laws developed in the 1930s are ill- equipped to regulate — inancial innovations like Hyper — unding. Some — irst principles regarding disclosure and liability — or

raud remain applicable. Part III argues that lawmakers must not overregulate against — inancial innovations so that enterprising corporations can continue to solve societal

19. Musk collected about 373,000 reservations during the initial presale campaign and later announced the Model 3’s starting price will be $49,000  --- or the

irst production vehicles. A cheaper shorter-range version will be available later

or $35,000, and a more expensive all-wheel-drive version will be available a — ter that. Chuck Jones, How Much Will Tesla’s Model 3 Really Cost?, FORBES (July 30, 2017), https://www. — orbes.com/sites/chuckjones/2017/07/30/how-much-will-teslas- model-3-really-cost/#3c — 139c57dcb [https://perma.cc/2YWW-L8NU]. 20. Lyndon Bell, Camry: The History o — Toyota’s Best Selling Car in America, AUTOBYTEL, https://www.autobytel.com/toyota/camry/car-buying-guides/camry- the-history-o — -toyota-s-best-selling-car-in-america-130599/ (last visited Feb. 19, 2018) [https://perma.cc/5QKN-94YR]. 21. Kelsey Mays, Toyota Camry Tops Most American-Made Vehicle Index, CHICAGO TRIB. (July 1, 2016), http://www.chicagotribune.com/classi — ied/ automotive/sc-most-american-made-autocover-0630-20160629-story.html [https://perma.cc/4ZQM-97N2]. 22. Claudia Assis, Tesla: Model 3 Had ‘Biggest One-Week Launch o — Any Product Ever’, MARKETWATCH (Apr. 7, 2016, 8:10 PM), http://www.marketwatch. com/story/tesla-picks-up-325000-reservations- — or-model-3-2016-04-07 [https://perma.cc/475L-VAVA].

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1038 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

problems. The Article concludes with some considerations about why regulations promulgated in response to a perceived or actual crisis are o — ten ine —

icient. Pro — essor Roberta Romano declared that the Sarbanes-Oxley Act o — 200223 was “quack corporate governance.”24 Pro — essor Stephen Bainbridge argued that the Dodd-Frank Act o — 2010 was even worse.25 How do we avoid these deleterious, knee-jerk legislative reactions? This Article proposes that perhaps we can avoid some o —

the

rauds, crises, and bubbles that empower legislators to pass such quack laws. It begins with the assumption that innovation is not only necessary but also inevitable. Then it considers the

irst principles o — corporate governance: we need — inancial regulation to prevent money managers (agents) — rom taking advantage o — investors (principals). These “agency costs” are higher when investors lack in — ormation or the ability to organize and negotiate — or themselves. There — ore, instead o —

proposing overbroad,

ar-reaching, potentially ine —

icient regulation, this Article recommends some common sense, light- touch regulations such as minimal disclosures and capital requirements. These regulations are not meant to protect every investor or consumer — rom the perils o — the marketplace, but rather to avoid massive — inancial catastrophes. It also provides some avenues — or — urther study.

1. Sarbanes-Oxley, or SOX, is a

   ederal law that implemented a comprehensive re — orm — or public accounting — irms, corporate management, and corporate boards o — directors. The Sarbanes-Oxley Act was passed in response to a number o — corporate accounting scandals that occurred between 2000 and 2002, most notably, the Enron and Worldcom collapses. See Larry E. Ribstein, Market vs. Regulatory Responses to Corporate Fraud: A Critique o — the Sarbanes-Oxley Act o — 2002, 28 J. CORP. L. 1 (2002).

2. Roberta Romano, The Sarbanes-Oxley Act and the Making o

   Quack Corporate Governance, 1523–26 (Yale Faculty Scholarship Series, Paper No. 1919), http://digitalcommons.law.yale.edu/ — ss_papers/1919 [https://perma.cc/PHA4 -64PG] (identi — ying eight attributes o — quack corporate governance: (1) bubble act enacted in response to major economic — ailure, (2) enacted during a crisis, (3) responded to populist and anti-corporate sentiment, (4) adopted by the — ederal government, (5) trans — erred power — rom states to the — ederal government, (6) supported by interest groups who are strong at the — ederal level but weak at the Delaware state level, (7) — ul — illed some longstanding agenda item o — a — ederally power — ul interest group, and (8) “supported” by weak or mixed empirical evidence).

3. Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 MINN. L. REV. 1779 (2011) (arguing that Dodd-Frank satis — ies substantially all o — Romano’s eight criteria — or quack corporate governance).

 Electronic copy available at: https://ssrn.com/abstract=2982554

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2018] HYPERFUNDING 1039

I. INNOVATIONS IN FUNDRAISING

This Part begins by identi --- ying and describing a new

inancing technique that was recently employed by Elon Musk.26 Musk leveraged his wunderkind personality to his great — undraising advantage, as did a young Henry Ford.27 These two Renaissance men share traits o — mechanical genius, business acumen, and electric personality, which attracted investors even when — undamental economics counseled otherwise.28 This Part explains how — inancial regulations were developed to protect investors against the sort o — irrational exuberance that Musk and Ford can generate.29 But our 1930s era — inancial regulations are poorly suited — or today’s rapidly changing — inancial landscape, as evidenced by Musk’s Tesla Model 3 Reservation Agreement.30 This Part closes by asking whether the unprecedented success o — that Reservation Agreement demonstrates an important new — inancing technique or is merely another example o — how charisma plus hype plus the internet results in unprecedented risks — or consumers.31

 A.    Hyper --- unding

Elon Musk32 recently experimented with an innovative

undraising mechanism, which I term Hyper — unding, to — inance a new generation o — EVs.33 Musk claims that Tesla’s upcoming Model 3 will be the — irst EV — or the everyman.34 But Musk must do — ar more than create an appealing EV. He must also

1. See in

   ra Section I.A.

2. Legend holds that by age ten, Henry Ford was repairing delicate pocket watches using only rudimentary tools, and by age thirteen he developed a new sort o — steam engine. A Young Henry Ford, HENRY FORD HERITAGE ASS’N, http://h — ha.org/the- — ord-story/young-henry- — ord/ (last visited Feb. 19, 2018) [https://perma.cc/SA5H-YE8M].

3. See in

   ra Section I.B.

4. See in

   ra Section I.C.

5. See in

   ra Section I.D.

6. See in

   ra Section I.E.

7. See generally MATT DOEDEN, SPACEX AND TESLA MOTORS ENGINEER ELON MUSK (2015).

8. Dana Hull, Musk Unveils Tesla’s $35,000 Model 3 in Push

   or Mass Market, BLOOMBERG (Apr. 1, 2016, 12:43 PM), http://www.bloomberg.com/news/ articles/2016-04-01/musk-unveils-tesla-s-35-000-model-3-in-push- — or-mass-market [https://perma.cc/CB96-JBN9].

9. Id.

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1040 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

create or

oster the creation o — a national network o — EV charging stations.35 EV charging networks pose a range o —

design problems that could

oil many innovators.36 The attempt to develop both EVs and EV charging networks simultaneously presents an incredible, multi-sided market problem.37 To solve these challenges, Musk (perhaps inadvertently) invented and deployed a new method o — raising money: Hyper — unding. The — irst example o — Hyper — unding—a term this Article uses to describe a — undraising campaign that raises many millions o — dollars by directly targeting a broad base o —

consumers or investors via the Internet—was likely Tesla’s Model 3 — inancing scheme. In March 2016, Tesla sold a hal —

million places in line to buy electric cars. While corporations have always engaged in presales — or bespoke items, where a tailor or an exotic car manu — acturer will take a deposit and then build a unique item — or a particular customer, this level o —

broad, public

inancial commitment — or a mass-production item is hereto — ore undocumented. Hyper — unding is more like crowd — unding, where startups generally raise a — ew hundred thousand dollars by advertising a product they want to develop on a portal like Kickstarter, but Hyper — unding eschews the portals and raises many orders o — magnitude more money.38 The sheer volume and speed o — Hyper — unding is similar to ICOs, where new blockchains and cryptocurrencies receive millions o — dollars in time periods as short as twenty- — our seconds39 (sometimes with disastrous results).40 Hyper — unding

1. Building the Supercharger Network

   or the Future, TESLA: BLOG (Jan. 12, 2017), https://www.tesla.com/blog/building-supercharger-network- — uture [https:// perma.cc/R8Z6-R4KY]; see also Holly Yan, Public Charging Stations Fuel Desire

or Electric Cars, CNN (Oct. 24, 2012, 9:52 AM), http://www.cnn.com/2012/10/ 24/us/public-car-chargers/ [https://perma.cc/YS75-6H2Q].

1. See, e.g., Kai Huang, Pavlos Kanaroglou, & Xiaozhou Zhang, The Design o — Electric Vehicle Charging Networks, 49 TRANSP. RES. PART D: TRANSPORT & ENVN’T 1, 1 (2016).

2. Enrico Gerding et. al, Two-sided Online Markets

   or Electric Vehicle Charging, 12TH INT’L CONF. ON AUTONOMOUS AGENTS & MULTIAGENT SYSTEMS 989, 989–90 (2013).

3. C. Steven Brad

   ord, Crowd — unding and the Federal Securities Laws, 2012 COLUM. BUS. L. REV. 1, 16–17 (“Kickstarter requires its projects to o —

er what it calls ‘rewards,’ typically o — the pre-purchase variety. According to Kickstarter, rewards are typically items produced by the project itsel — .”).

1. Chance Barnett, Inside the Meteoric Rise o

   ICOs, FORBES (Sept. 27, 2017), https://www. — orbes.com/sites/chancebarnett/2017/09/23/inside-the-meteoric- rise-o — -icos/#419 — 3d105670 [https://perma.cc/3BRB-AVWU].

2. Steven Norton, Down

   all o — DAO Digital Currency Fund Shows

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2018] HYPERFUNDING 1041

is legally distinguishable

rom ICOs. Hyper — unding, however, would probably — ail the Howey test — or securities o —

erings because it is not about earning returns on investment but actually receiving a desired product; whereas, according to the SEC, ICOs have met the Howey test.41 Since Hyper — unding would probably not subject its promoter to securities liability, the law should consider whether alternative means o —

protecting people

rom its negligent or — raudulent use is warranted.

 B.    Elon Musk and Henry Ford

 Creating an electric car  --- or $35,000 that can be driven

rom state to state thanks to a network o — Supercharger stations is a — eat o — engineering, — inance, salesmanship, and politics.42 A project o — this magnitude is reminiscent o — Henry Ford’s project to create the — irst a —

ordable gasoline-powered car.43 Ford, like Musk, was an unconventional inventor who did not always agree with his investors.44 Ford loved the spotlight

Blockchain Reputational Risk, WALL ST. J.: CIO JOURNAL. (June 20, 2016, 6:35 PM), https://blogs.wsj.com/cio/2016/06/20/down — all-o — -dao-digital-currency- — und- shows-blockchain-reputational-risk/ [https://perma.cc/Y9CX-D99V]. 41. Sec. & Exch. Comm’n, Report o — Investigation Pursuant to Section 21(a) o —

the Securities Exchange Act o

1934: The DAO, Release No. 81207, July 25, 2017, https://www.sec.gov/litigation/investreport/34-81207.pd — [https://perma.cc/BFJ4- W8GN] [hereina — ter SEC DAO Report] (“The DAO, an unincorporated organization, was an issuer o — securities.”). 42. See John C.K. Pappas, A New Prescription — or Electric Cars, 35 ENERGY L.J. 151, 188 (2014) (stating that while EVs present an optimistic — uture o — less dependence on oil and — ossil — uels, the industry has a long way to go be — ore the United States universally accepts these cars). Although this is not as ambitious as sending people to Mars. See Olivia Solon, Elon Musk Has Ambitious Plans — or Mars. Are They as Crazy as They Sound?, GUARDIAN (Sept. 27, 2016, 7:00 AM), https://www.theguardian.com/technology/2016/sep/27/elon-musk-spacex-mars- exploration-space-science [https://perma.cc/GFR4-7TL5] (discussing Elon Musk’s ambition to colonize Mars through his private company SpaceX by launching its

irst manned mission in 2024). 43. See Cadie Thompson, The Fascinating Evolution o — the Electric Car, BUS. INSIDER (Feb. 15, 2017, 1:20 PM), http://www.businessinsider.com/electric-car- history-2017-2/#the-electric-car-burst-onto-the-scene-in-the-late-1800s-and-early- 1900s-1 [https://perma.cc/CJZ7-5CSW] (discussing how Ford, in meeting an overwhelming demand — or the — irst Model T, introduced revolutionary new mass production methods, including large production plants and standardized parts). 44. VINCENT CURCIO, HENRY FORD 30–33 (2013) (In the early days o — the Detroit Automobile Company, Ford convinced investors to lend him money to build a two-seat delivery wagon, but “[i]n actuality, the Detroit Automobile Company had not been expending a lot o — e —

ort in building commercial vehicles.

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1042 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

and used the media to drive investors and consumers to his products.45 But Ford’s animus — or money led him to engage in sharp business practices that would probably be illegal today.46 Ford bamboozled investors47 to — inance the Model T, a “minor” deception that would be illegal under modern securities regulation48 but ostensibly permissible in 1900 and perhaps today under Hyper — unding. Ford’s anti-shareholder attitudes led to the — amous case o —

Dodge v. Ford Motor Co.,49 which has become the textbook paradigm — or the principle that corporations must seek to maximize shareholder value.50 Yet — or a time, the general public adored Ford,51 despite his many — oibles (such as his violent opposition to unions52 and his vocal anti-Semitism53).

Ford was not really happy working

or hire with only a small pro — it participation; o — tentimes he wasn’t around the shop, in essence hiding — rom his backers. What he really did with the $86,000 the company lost was to investigate the building o —

a racing car”).

1. Id. at 33 (“[Ford] would make enormous use o

   publicity in the coming decades; in — act, he would become one o — its great masters.”).

2. Even Ford’s most apologetic biographer admits that Ford essentially tricked his initial investors. Ford disagreed with his investors about what kind o —

cars to develop. “Ford wanted cheaper ones

or the masses, and Malcomson wanted the company to turn out more luxurious models like their new six-cylinder Model K.” See id. at 44–55. Ford got rid o — Malcomson by creating a new company, the Ford Manu — acturing Company, and dedicated his resources to it. See id. The behavior would almost certainly constitute a con — lict o — interest under modern

iduciary duties.

1. STEVEN WATTS, THE PEOPLE’S TYCOON: HENRY FORD AND THE AMERICAN CENTURY 51–98 (2006) (“Yet [Ford] used subter — uge to deceive his investors, and once even directed machinists to produce auto parts that would never go into a car, just to make investors think that his — actory was actually manu — acturing something.”).

2. See, e.g., Employment o

   Manipulative and Deceptive Devices, 17 C.F.R. § 240.10b-5 (2018). The Securities Exchange Act o — 1934 Rule 10b-5 prohibits any act or omission resulting in — raud or deceit in connection with the purchase or sale o — any security.

3. 170 N.W. 668 (Mich. 1919).
4. See, e.g., ALAN PALMITER & FRANK PARTNOY, CORPORATIONS: A CONTEMPORARY APPROACH 98 (2d ed. 2014) (“Dodge v. Ford Motor is o — ten cited by academic writers as support o — the shareholder primacy view: ‘A business corporation is organized and carried on primarily — or the pro — it o — the stockholders.’”).

5. CURCIO, supra note 44, at xi (“In the wake o

   the announcement o — the

ive-dollar, eight-hour day at the Ford Motor Company at the beginning o — 1914, Ford was lionized, and sometimes mobbed, by a grate — ul populace. They considered him a public bene — actor o — the highest quality, a — orce — or good beyond that — ound in the souls o — ordinary men.”).

1. WATTS, supra note 47, at 441–54 (“[Henry Ford] hir[ed] thugs to beat union organizers.”).

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2018] HYPERFUNDING 1043

Ford’s

uneral was attended by 100,000 people.54 The corporation that bears his name is still one o — the top ten most success — ul American companies o — all time.55 Both Ford and Tesla combined ingenuity with reckless disregard — or convention, which earned them the admiration o —

the people. At times, both populist capitalists Musk56 and Ford57 may have disregarded the law. Ford in particular despised his shareholders,58 tried to limit their pro — its,59 and may have deceived them.60 Musk, — or his part, is now caught up in a shareholder lawsuit that claims Tesla misled stockholders in its proxy statement soliciting them to vote — or Tesla’s acquisition o — SolarCity.61 But both stead — astly proclaimed a populist message, which resonated with consumers, regulators, and many investors. Their charisma allowed them to push the envelope in tech, law, and — inance.

1. Ford’s anti-Semitism was so renowned that Adol

   Hitler mentioned Ford (and no other American) in Mein Kamp — , and “Hitler was also said to have a — ull- length portrait o — Ford in the headquarters o — the National Socialist Party.” CURCIO, supra note 44, at 144. See also WATTS, supra note 47, at 376–400 (“[Henry Ford] was a virulent anti-Semite and a ‘bigot.’”).

2. CURCIO, supra note 44, at 267.

3. Here Are the Top 10 Most Success

   ul American Companies, FORTUNE MAG. (June 6, 2016), http:// — ortune.com/2016/06/06/ — ortune-500-top-10-companies/ [https://perma.cc/5SCF-VFK6] (“9. Ford Motor Fortune 500 Rank: No. 9, 2015 Revenue: $149.6 billion.”).

4. For example, Musk allegedly ran an illegal speakeasy bar out o

   his dorm room at the University o — Pennsylvania. Adeo Ressi, Musk’s College Speakeasy Days, ELON ENTHUSIAST (Aug. 13, 2012, 7:55 AM), http://elonenthusiast.com /post/29338272966/lets-start-a-nightclub [https://perma.cc/7U77-8JMK].

5. Even Ford’s o

icial biographer Allan Nevins does not entirely gloss over the — act that “[Henry Ford] hir[ed] thugs to beat union organizers.” WATTS, supra note 47, at 51–98.

1. CURCIO, supra note 44, at 103; see also SAMUEL MARQUIS, HENRY FORD: AN INTERPRETATION 159 (2007) (“Stockholders, in his opinion, as he expressed it, were in danger o — becoming ‘parasites.’ And so in time the stockholders went.”).
2. CURCIO, supra note 44, at 103–05.
3. Id.
4. Complaint at 32, In re Tesla Motors, Inc., Stockholders Litigation, C.A. No. 12711-VCS (Del. Ch. 2016) (No. 12745-VCS), 2016 WL 4821727. (“73. On August 31, 2016, Tesla and SolarCity — iled the Proxy with the SEC. In the Proxy, the Board asks — or Tesla’s stockholders to vote to approve the Proposed Acquisition and corresponding share issuance. However, the Proxy omits material in — ormation that prevents Tesla’s stockholders — rom making a — ully in — ormed vote.”).

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 C.    Financial Regulatory Theory

 Ford’s motto can be summed up thus: “you cannot make an omelet without breaking eggs.”62 He’s right, but who should be allowed to take a crack? Policymakers and regulators must make rules that pertain equally to a similarly situated class o ---

market participants. The United States should not have one set o — laws and regulations — or popular capitalists like Henry Ford and Elon Musk, and another set — or everyone else.63 Optimal regulation will allow some rotten things. Financial regulatory policy must allow — or some rotten egg- breaking because “[t]he optimal amount o — [business] risk is not zero.”64 Likewise, in commercial contexts, “the optimal level o — regulation is not zero.”65 There — ore, we do not seek zero crime,66 zero pollution,67 or zero constitutional violations.68

1. This adage means that “it is hard to achieve something important without causing unpleasant e —

ects.” You can’t make an omelet without breaking eggs, CAMBRIDGE DICTIONARY, http://dictionary.cambridge.org/us/dictionary/english/you -can-t-make-an-omelette-without-breaking-eggs (last visited Feb. 19, 2018) [https://perma.cc/5NMR-EV9Y].

1. This is at least ostensibly the case, although it is not beyond credibility that the U.S. regulatory system is at least somewhat subject to the problems o —

“crony capitalism.” See generally Stephen Haber, Introduction: The Political Economy o — Crony Capitalism, in CRONY CAPITALISM AND ECONOMIC GROWTH IN LATIN AMERICA: THEORY AND EVIDENCE xiii, xix (Stephen Haber ed., 2002); STEVE FRASER, EVERY MAN A SPECULATOR: A HISTORY OF WALL STREET IN AMERICAN LIFE (2005) (arguing that Wall Street dominated politics in the 1920s such that President Coolidge supported a public policy o — crony capitalism).

1. Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89, 105 (1985); see also Paul B. Stephan, The Futility o — Uni — ication and Harmonization in International Commercial Law, 39 VA. J. INT’L L. 743, 747 (1999) (“There is, in other words, an optimal level o — legal risk that is greater than zero.”).

2. Oren Bar-Gill, The Behavioral Economics o

   Consumer Contracts, 92 MINN. L. REV. 749, 795 (2008) (“The impediments to wel — are-enhancing regulation are numerous and substantial. These impediments caution against any regulation, not only against regulation motivated by consumer mistakes. Still, despite all the costs and risks and imper — ections, the optimal level o — regulation is not zero. Some regulation is wel — are-enhancing.”).

3. See, e.g., Murat Mungan, Optimal Preventive Law En

   orcement and Intervention Standards (Fla. St. U. College o — Law, Public Law Research Paper No. 701), https://papers.ssrn.com/sol3/papers.c — m?abstract_id=2481367&rec=1& srcabs=2596108&alg=1&pos=1 [https://perma.cc/HE8P-XZ9W].

4. See John C. Co

ee, Jr., Paradigms Lost: The Blurring o — the Criminal and Civil Law Models—and What Can Be Done About It, 101 YALE L.J. 1875, 1885 (1992) (“Clearly, however, the optimal level o — pollution or worker accidents is above zero, because to reduce these levels to zero would require unlimited expenditures on precautions.”).

1. See Daryl J. Levinson, Making Government Pay: Markets, Politics, and the

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Cost-bene --- it analysis can reveal optimal regulation, but analysis takes e ---

icient implementation, time, money, and sustained political will.69 Besides, most legislatures do not ponti — icate about regulating securities that have just begun to exist.70 That is — or scholars. Categorical regulation is extremely di —

icult and o — ten leads to — ailure.71 Overbroad, oversimpli — ied, categorical regulations o — ten result — rom governmental responses to panic and chaos.72 History is replete with examples o — controversial regulations — orged by crisis.73 Crises seem especially e —

ective

Allocation o

Constitutional Costs, 67 U. CHI. L. REV. 345, 369 (2000) (“For categories o — constitutional violations that do generate substantial compliance costs, we seem to accept, in practice i — not in theory, that the optimal level o —

constitutional violations is greater than zero.”).

1. See John C. Coates IV, Cost-Bene

   it Analysis o — Financial Regulation: Case Studies and Implications, 124 YALE L.J. 882 (2015).

2. Congress did not regulate credit de

   ault swaps until they were blamed — or sending the entire world economy into a deep recession. See Douglas B. Levene, Credit De — ault Swaps and Insider Trading, 7 VA. L. & BUS. REV. 231, 263–65 (2012) (describing legislation enacted by Congress with respect to Rule 10b-5 and insider trading in equity securities, including credit de — ault swaps).

3. Barak Orbach, What Is Regulation?, 30 YALE J. REG. ONLINE 1, 8 (2013) (discussing the controversial nature o — regulations — orbidding — inancial instruments that enable the accumulation o — debt).
4. E.g., Mark B. Baker, Promises and Platitudes: Toward A New 21st Century Paradigm — or Corporate Codes o — Conduct?, 23 CONN. J. INT’L L. 123, 141 (2007) (“A — inal problem is that when the government creates legislation in response to a crisis, it may create overreaching or overbroad regulation.”).

5. Controversial regulations

   orged in crisis include the — ollowing: the Sarbanes-Oxley Act o — 2002, Pub. L. No. 107-204, 116 Stat. 745, see Romano, supra note 24, at 1594 (“Financial turmoil thus appears to be a necessary but not su —

icient condition — or the enactment o — market regulation, and the quality o —

ederal legislative decisionmaking in such an environment has consistently le — t much to be desired.”); the Patriot Act o — 2001, Pub. L. No. 107-56, 115 Stat. 272 (Oct. 26, 2001), see Rebecca M. Kysar, Lasting Legislation, 159 U. PA. L. REV. 1007, 1067 n.254 (2011) (“An example o — when Congress used temporary legislation in response to a crisis is the antiterrorist legislation known as the USA PATRIOT Act, passed in response to the attacks on the United States in September 2001, with the goal o — expanding the investigatory power o — law en — orcement, the discretion o — authorities to detain and deport suspected terrorists, and the ability o — the Treasury Department to regulate suspicious

inancial transactions.”); the — ederal securities laws, including the Securities Act o — 1933, 15 U.S.C. §§ 77a et seq. (2012), and the Securities Exchange Act o — 1934, the Securities Exchange Act o — 1934, 15 U.S.C. §§ 78a et seq. (2012), see Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure o — Corporate Law, 58 VAND. L. REV. 1573, 1589 (2005) (“The classic examples o — large scale

ederal incursion into corporate law in response to crisis and scandal are the enactment o — the 1933 Securities Act and the 1934 Securities Exchange Act, which created the SEC and, more recently, the enactment o — the Sarbanes-Oxley Act and the changes in the stock exchange listing rules.”).

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1046 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

in galvanizing the legislature to enact new

inancial regulations.74 Studying new phenomena in corporate — inance in order to better understand them and proactively consider whether and how to regulate75 them can stave o —

the overly restrictive and hyper-reactive regimes that are too o — ten harshly imposed when these innovations are — latly blamed — or economic crises. Ford’s story also teaches power — ul lessons about innovation, personality, and regulation, which are directly applicable to understanding Musk and Hyper — unding. Like Ford, Tesla is likewise doing something massive that requires bending or breaking a — ew o — the old rules. Creating a physical multi-sided network requires massive scale. This includes building a “giga — actory” — or industrial-scale battery production,76 developing new industrial materials,77 obtaining scarce resources needed — or next-generation mass production o —

electric vehicles,78 and creating an in

rastructure o — vehicle recharging stations.79 A project o — this magnitude presents unique — inancing needs. To — inance this unprecedented undertaking, Tesla simultaneously demonstrated the prototype Model 3 and accepted $1,000 “reservations” — or this — uture

1. Stuart Banner, What Causes New Securities Regulation? 300 Years o

Evidence, 75 WASH. U. L.Q. 849, 850 (1997) (“I

new technology doesn’t cause new securities regulation, what does? In a nutshell, crashes. All o — the 18th-century English regulation, and even all o — the 18th-century proposed regulation, came immediately a — ter sustained price declines. The — irst signi — icant American securities regulation, passed in 1792 in New York, — ollowed the big crash o — that year. And o — course the — ederal securities acts o — the early 1930s came soon a — ter the crash o — 1929.”) ( — ootnotes omitted); see also Brian T. Sullivan, CSX Corp. v. Children’s Investment Fund Management and the Need — or Sec Expansion o —

Bene

icial Ownership, 87 N.C. L. REV. 1300, 1303 n.18 (2009) (“Interestingly, the enactment o — each piece o — legislation tended to — ollow closely on the heels o — a major economic crisis, indicating that securities regulation has been more reactionary than proactive in nature.”).

1. Regulation here means only the public intervention in the private domain. This can include both prohibitory and permissive regulation. See Orbach, supra note 71, at 6.

2. Tesla Giga

   actory, TESLA, https://www.tesla.com/giga — actory (last visited Feb. 19, 2018) [https://perma.cc/C338-FHSP].

3. Henry Sanderson, Tesla in High Demand

   or Lithium Supply, FIN. TIMES, (June 8, 2017), https://www. — t.com/content/90d65356-4a9d-11e7-919a- 1e14ce4a — 89b [https://perma.cc/83YE-66JR].

4. Id.

5. Building the Supercharger Network

   or the Future, supra note 35.

6. Id.

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vehicle.80

 D.    Tesla’s Reservation Agreement

 Tesla’s Model 3 Reservation Agreement is a strange sort o ---

contract. At

irst blush, a consumer would think that she is giving $1,000 to Tesla as a down payment on a Model 3. Indeed, that is normal in the auto industry.81 But the Reservation Agreement that one receives upon providing the $1,000 deposit expressly “does not constitute the purchase or order o — a vehicle,” and “[u]ntil you enter into a Purchase Agreement, your Reservation may be cancelled at any time.”82 Indeed, Telsa does not really promise to provide anything in return — or the $1,000 deposit: Tesla’s unlimited option to cancel the Reservation makes Tesla’s per — ormance entirely optional. An entirely optional promise is illusory and does not constitute good and valuable consideration.83 There — ore, at the outset, it is not even clear that the Reservation Agreement is a binding contract.84 Even i — the Reservation Agreement requires Tesla to deliver a Model 3 car to a Reservation Holder, there is no timetable — or Tesla’s per — ormance. Tesla has taken advantage o — this ambiguity. CEO Elon Musk originally promised to deliver 5,000 cars per week in 2017Q4, but the company only delivered 1,550 vehicles in that quarter, and Tesla has — ailed to meet additional production targets since then.85 While there

80. Assis, supra note 22.
81. Auto consumers expect to make a down payment when placing a  --- actory order  --- or a car. This type o ---  transaction is so typical that third party intermediaries are in the business o ---

acilitating such transactions. See Why Special Ordering a New Car Can Be Your Best Choice, CARTELLIGENT, https://www.cartelligent.com/blog/why-special-ordering-new-car-can-be-your-best- choice (last visited Feb. 19, 2018) [https://perma.cc/7GT3-5TVS]. 82. Model 3 Reservation Terms & Conditions, TESLA, https://www.tesla.com /sites/de — ault/ — iles/pd — s/model_3_reservation_agreement.pd — (last visited Feb. 19, 2018) [https://perma.cc/HCU8-23MX]. 83. Words o — promise, which by their terms make per — ormance entirely optional with the “promisor,” do not constitute a promise. RESTATEMENT (SECOND) OF CONTRACTS § 77 (AM. LAW INST. 1981). 84. To constitute consideration, a per — ormance or a return promise must be bargained — or. RESTATEMENT (SECOND) OF CONTRACTS § 71 (AM. LAW INST. 1981). 85. Jack Stewart, Tesla Delays Its Model 3 Production Goals—Again, WIRED (Jan. 3, 2018, 5:57 PM), https://www.wired.com/story/musk-model-3-tesla- production-delays-january/ [https://perma.cc/7DW8-GUSZ] (“I — you are eagerly awaiting your Tesla Model 3, it might be time to download that meditation app,

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1048 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

are not yet any reports o

Reservation Holders suing Tesla — or the delay—perhaps because the Reservation Agreement does not actually give them any recourse—at least one shareholder

iled suit alleging that Tesla and Musk improperly hid production problems — rom investors.86 In other words, the Reservation Agreement is not a typical deposit agreement. It is notable or peculiar — or at least nine reasons. First, it is not really a reservation agreement but a revocable option to place an order.87 Second, it guarantees prepurchasers almost nothing — or certain.88 Third, at only one page long, Tesla’s Reservation Agreement is very short and clearly missing many terms that are usually — ound when someone purchases or invests in something.89 Fourth, prepurchasers do not learn their position in the queue.90 Fi — th, position in the queue a —

ects price because — ederal tax credits o —

$7,500 are available only to the

irst 200,000 buyers.91 Sixth, unlike most deposits, which are — or a particular good that already exists or — or a speci — ic item to be produced, Tesla preorder “customers” do not even know the — inal price or

eatures available on the Model 3.92 Seventh, deposits are not just applied to build that prepurchaser’s car or even the Model 3 generally: Musk said these — unds would build the Giga — actory

because you’re gonna have to relax and get ready to wait.”). 86. Chris Isidore, Tesla Sued — or Model 3 Delays, CNN TECH (Oct. 31, 2017, 3:10 PM), http://money.cnn.com/2017/10/31/technology/tesla-shareholder-suit- model-3/index.html [https://perma.cc/AQ5M-N5ND]; Complaint, Wochos v. Tesla, Inc., No. 17-cv-05828 (N. D. Cal., Oct. 10, 2017), ECF No. 1. 87. Model 3 Reservation Terms & Conditions, supra note 82. 88. Although deposits are eligible — or a re — und (while — unds last!). See id. The Reservation Agreement states that “[Y]our Reservation may be cancelled at any time, in which case you will receive a — ull re — und o — your Reservation Payment.” Id. 89. Id. 90. See id. In — act, Tesla changed the source code o — its website expressly to prevent Reservation Holders — rom determining their priority position. See Fred Lambert, Tesla Model 3: There’s a Way to See Where You Are in the Queue, Check It Be — ore Tesla Finds Out, ELECTREK (June 7, 2016, 5:34 AM), https://electrek.co/2016/06/07/tesla-model-3-reservation-queue-number/ [https://perma.cc/B6RX-Y2GV] (“Update #2: It looks like Tesla changed the source code o — the ‘My Tesla’ page and the ’common_reservation_id’ number is not accessible anymore.”). 91. Evan Niu, 3 Things You Need to Know Be — ore Reserving Tesla’s Model 3 Next Month, MOTLEY FOOL (Feb. 14, 2016, 12:00 PM), http://www. — ool.com/ investing/general/2016/02/14/3-things-you-need-to-know-be — ore-reserving- teslas.aspx [https://perma.cc/3M74-YYNG]. 92. Id.

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that makes all Tesla batteries and produce other Tesla vehicles like the Model S and Model X.93 Eighth, “consumers” appear to be attempting to re-sell their preorder rights in an in — ormal secondary market.94 Ninth, and perhaps more important — or policy consideration, Tesla raised almost a hal — -billion dollars — rom the general public without any sort o — regulatory — iling or oversight.95 On the — irst day o — taking reservation payments — or the Model 3, Musk boasted that Tesla received 180,000 orders within twenty- — our hours.96 Crunching some numbers, Musk went on to say that, at an average sale price o — $42,000, Tesla sold roughly $7.5 billion worth o — cars that day.97 At the end o —

June, the number o

reservations was reported to be roughly 400,000, or $400 million worth o — reservation payments.98 By the end o — 2016, Tesla received almost $700 million in Model 3 deposits.99 With no concrete time — rame, production schedule, in — rastructure, escrow, oversight, or accountability to deliver the Model 3, this does not appear to be a typical reservation scenario. What is Tesla’s Reservation Agreement? What regulatory systems should govern it? It has — eatures o — both a security and a deposit, but the regulations and protections o — neither.100 Reservation Holders’ rights turn on the analysis o — this contract. Understanding this ambiguous agreement requires extrinsic evidence as to its purpose and intent. Its purpose — or

1. Jack Stewart, This Is the Enormous Giga

   actory, Where Tesla Will Build Its Future, WIRED (July 7, 2016, 7:00 AM), https://www.wired.com/2016/07/tesla- giga — actory-elon-musk/ [https://perma.cc/7NEA-7R8T].

2. Even though such a trans

   er violates Tesla’s Reservation Agreement, it appears depositors are — inding work-arounds. See John Voelcker, Tesla Model S Depositors: You Can’t Sell Your Reservation, Legally, GREEN CAR REPS. (Dec. 11, 2012), http://www.greencarreports.com/news/1081031_tesla-model-s-depositors- you-cant-sell-your-reservation-legally [https://perma.cc/ZJ75-KGUT] (discussing how — our Tesla Model S electric sport sedans were o —

ered — or sale on eBay despite language in the Reservation Agreement that explicitly restricted trans — ers).

1. Lambert, supra note 1.
2. Steve Hanley, Tesla Crushes Nearly 250,000 Model 3 Reservations into Day 2, TESLARATI (Apr. 2, 2016), http://www.teslarati.com/tesla-crushes-nearly- 250000-model-3-reservations/ (last visited Feb. 19, 2018) [https://perma.cc/DVY7- VF5B].
3. Id.
4. Fred Lambert, Tesla is Now Holding onto $700 million in Consumer Deposits, ELECTREK (Oct. 27, 2016, 8:34 AM), https://electrek.co/2016/10/27/tesla- model-3-700-million-customer-deposits/ [https://perma.cc/WDX2-R2WE].
5. Id.

6. See in

   ra Part III.

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1050 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

both Tesla and its prepurchasers is to

und a market — or EVs.

 E.    Hype or Funding?

 While raising almost a billion dollars seems like quite a

eat, was this really a — inancing operation or just done — or marketing hype? While I argue that Tesla’s presale meets criteria — or both hype and — unding, it is important to consider the — actors that may indicate this was really about hype and not about — unding. Tesla does not struggle to access capital markets. As a publicly traded company, Tesla can raise money interest- — ree by selling stock.101 As o — March 31, 2017, Tesla had accumulated over $8.5 billion o — paid-in capital by issuing common stock.102 On that date, when Tesla had 164,164,000 shares o — common stock outstanding,103 Tesla’s common stock price closed at $278.30 per share,104 — or a market capitalization o — over $45.6 billion. At that time, Tesla was authorized to issue up to two billion shares o — common stock,105 which could have raised signi — icant — unds without requiring any interest payments.106 But issuing more stock is not — ree: — irst, it dilutes existing shareholders’ value and control, including the value and control o — managers107 like Elon Musk who have signi — icant stakes in Tesla.108 Second, even i — a company is

1. U.S. Sec. & Exch. Comm’n, Public Companies, INVESTOR.GOV, https://www.investor.gov/introduction-investing/basics/how-market-works/public- companies (last visited Feb. 19, 2018) [https://perma.cc/79AA-V3DU].
2. Tesla Motors, Inc., Quarterly Report (Form 10-Q) 4 (May 10, 2017) [hereina — ter Tesla March 2017 10-Q].
3. Id.
4. Tesla Historical Stock Prices, NASDAQ, https://www.nasdaq.com/symbol /tsla/historical (last visited Feb. 19, 2018) [https://perma.cc/VG98-VJYC].
5. Tesla Motors, Inc., Annual Report (Form 10-K) (Mar. 1, 2017).
6. This does not mean that Tesla could have raised up to $510.9 billion by selling all its authorized but unissued shares. The stock price — alls as additional stock is issued. RICHARD BREALEY & STEWART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 297 (3d ed. 1988); see also Paul Asquith & David W. Mullins, Jr., Equity Issues and O —

ering Dilution, 15 J. FIN. ECON. 61, 61 (1986) (“Financial executives, investment bankers and many regulators argue that selling equity causes a — irm’s stock prices to — all.”).

1. Je

rey N. Gordon, Ties that Bond: Dual Class Common Stock and the Problem o — Shareholder Choice, 76 CALIF. L. REV. 1, 52 (1988) (“The dilution o —

management’s control position by the issuance o

additional common stock eliminates its ability to consume perequisites [sic]. This results in a wealth trans — er — rom managers to public shareholders.”).

1. Elon Musk owns about 27% o

   Tesla. See Tesla, Inc. Ownership Summary,

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already publicly listed on a stock exchange, it can be very expensive to issue more stock, even i — the company conducts a “shel — takedown” using SEC Rule 415.109 Tesla could also access the debt market to secure a loan. Tesla has a revolving credit — acility110 under which it could draw about $360 million at 4.2% to 6.5% interest rates.111 Tesla also has a credit agreement to borrow almost $1 billion at 1% plus LIBOR.112 Tesla is paying 1%, or 100 basis points, above LIBOR, so its interest rate on August 6, 2017, would be about 0.81%.113 This is a very low interest rate when compared to the bonds Tesla issued in August 2017,114 but both pale in

NASDAQ, http://www.nasdaq.com/symbol/tsla/ownership-summary (last visited Feb. 21, 2018) [https://perma.cc/2WQD-WQPU].

1. A shel

   o —

ering occurs where a company has previously registered more securities than it intended to sell. Later, pursuant to SEC Rule 415, the company can “takedown” those registered securities by — iling a Form S-3. While this process is less costly than repeating the entire registration process, it still requires substantial legal work and — iling — ees and may increase agency costs, see James J. Park, Two Trends in the Regulation o — the Public Corporation, 7 OHIO ST. ENTREPRENEURIAL BUS. L.J. 429, 438 (2012) (“Though it reduces o —

ering costs, shel — registration also undermines the ability o — underwriters to scrutinize public companies each time they o —

er securities to the public.”), although it may result in lower due diligence costs, see Joseph K. Leahy, The Irrepressible Myths o —

Barchris, 37 DEL. J. CORP. L. 411, 451–52 (2012) (“[T]he bene

its stemming — rom due diligence in shel — -registered o —

erings do not outweigh the costs — rom an investors perspective.”).

1. A revolving credit

   acility, or “revolver,” is a line o — credit, similar to a credit card. The borrower pays an up- — ront — ee in exchange — or the ability to borrow up to a certain amount o — money — rom a bank. The borrower only pays interest on the outstanding balance. The interest rate on the outstanding balance o — a revolver may vary depending on extrinsic — actors like LIBOR and intrinsic

actors like the borrower’s current creditworthiness.

1. Tesla March 2017 10-Q, supra note 102.

2. LIBOR stands

   or the London Interbank O —

ered Rate. It is o — ten used as a benchmark — or variable interest rates because it re — lects the rate that one o — the world’s leading banks would charge another leading bank to lend money. There are di —

erent LIBOR rates — or short-term and long-term loans, and short-term LIBOR is generally lower than long-term LIBOR. I — the term is not speci — ied, the 12-month LIBOR rate is generally presumed. LIBOR can be positive or negative. Most businesses are not as creditworthy as leading banks, so most business pay more than LIBOR — or loans. Depending on the creditworthiness o — the business, lenders will charge them “basis points.” One basis point is equal to 0.01%. Basis Point (BPS), INVESTOPEDIA, https://www.investopedia.com/terms/b/basispoint.asp (last visited Mar. 13, 2018) [https://perma.cc/H7U7-38M3].

1. On July 6, 2017, the 12-month LIBOR was -0.18986%. 12 Month US Dollar LIBOR Interest Rate, GLOBAL-RATES.COM, http://www.global-rates.com /interest-rates/libor/libor.aspx (last visited Feb. 19, 2018) [https://perma.cc/UCQ8- JHEA].
2. Claudia Assis & Ciara Linnane, Tesla’s Junk Bonds are Trading Under Water—And it Could Spell Trouble — or Elon Musk, MARKETWATCH (Nov. 15, 2017,

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comparison when considering the Model 3 presale raised interest- — ree capital.115 Moreover, it is not clear that Tesla could obtain another loan on such — avorable rates. Tesla may have already collateralized all o — its property, and its creditworthiness may have decreased.116 On the other hand, Musk’s penchant — or the spectacular suggests that the Tesla Model 3 presale was a publicity stunt. On Sunday, January 21, 2018, Musk announced The Boring Company (another enterprise he owns that plans to dig transit tunnels many levels deep to solve tra —

ic congestion problems and enable Hyperloop adoption)117 will raise money by pre- selling The Boring Company Flamethrower (“Guaranteed to liven up any party! World’s sa — est — lamethrower!”).118 In less than a week, The Boring Company presold $3.5 million worth o —

lamethrowers.119 While some laud Musk — or making The Boring Company a “hot ticket,”120 others remark that this publicity stunt is a “colossally bad idea.”121 Meanwhile,

8:00 AM), https://www.marketwatch.com/story/teslas-junk-bonds-are-trading- under-water-and-it-could-spell-trouble- — or-elon-musk-2017-11-10 [https://perma.cc/PUS5-KU9P].

1. See id.
2. While it has not yet been empirically demonstrated, a decline in stock price has caused credit rating agencies to downgrade their rating o — a publicly traded company. Downgrading a company’s credit rating can lead to the inability to borrow money, a cash- — low crisis, and bankruptcy. See, e.g., Marleen A. O’Connor, The Enron Board: The Perils o — Groupthink, 71 U. CIN. L. REV. 1233, 1234 (2003) (“The decline in Enron’s stock price caused credit rating agencies to downgrade their assessments o — Enron. Within weeks, the crisis o — con — idence led Enron to — ile bankruptcy.”). In — act, Tesla’s stock price decreased substantially since it was able to secure loans at LIBOR plus 100 basis points. Tae Kim, Tesla Sinks 20% — rom High – Entering Bear Market Territory – as Concerns about ‘Bubble Stock’ Mount, CNBC (July 6, 2017, 8:38 AM), http://www.cnbc.com /2017/07/06/tesla-shares-plunge-12-percent-this-week-on-disappointing- deliveries.html [https://perma.cc/J49J-3DXH]. This may indicate that Tesla would now have a much higher cost o — capital — or debt.

3. FAQs, BORING CO., https://www.boringcompany.com/

   aq/ (last visited Feb. 20, 2018) [https://perma.cc/8SC5-6G95].

4. Flamethrower, BORING CO., https://www.boringcompany.com/

   lame thrower/ (last visited Feb. 20, 2018) [https://perma.cc/R8T9-FKM8].

5. Ryan Browne, Elon Musk’s Boring Company Sold $3.5 Million Worth o

Flamethrowers, USA TODAY (Jan. 29, 2018, 8:09 AM), https://www.usatoday.com /story/tech/news/2018/01/29/elon-musks-boring-company-sold-3-5-million-worth-

lamethrowers/1074037001/ [https://perma.cc/TW45-ZZJ9].

1. Fire Sale: How Elon Musk Made a Boring Flamethrower a Hot Ticket, GUARDIAN (Jan. 30, 2018, 7:39 AM), https://www.theguardian.com/technology/ shortcuts/2018/jan/30/ — ire-sale-how-elon-musk-made-a-boring- — lamethrower-a-hot- ticket [https://perma.cc/2C8G-STKE].
2. Eric Adams, Elon Musk’s Boring Company Flamethrower Seems Like a

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Cali

ornia Assemblyman Miguel Santiago (D-Los Angeles) plans to introduce a bill that would ban its sale, so it is not clear whether presale consumers will ever get their hands on the “world’s sa — est — lamethrower.”122 Musk once again employed shock-and-awe marketing tactics on February 6, 2018, when he sent a Tesla sports car into space aboard a SpaceX Falcon Heavy cargo-li — ting rocket.123 In what has been hailed as a “marketing innovation,”124 Musk live-streamed the $100,000 red roadster en route to Mars through the vacuum o — space with a dummy wearing an o —

icial SpaceX spacesuit in the driver’s seat,125 the words “Don’t Panic” written on the windshield in large, — riendly letters,126 and David Bowie’s song “Space Oddity” playing on its

Colossally Bad Idea, DRIVE (Jan 29, 2018), http://www.thedrive.com/tech/ 18040/elon-musks-boring-company- — lamethrower-seems-like-a-colossally-bad-idea [https://perma.cc/6F37-NC7U].

1. Nick Statt, Cali

   ornia Politician Will Seek Sale Ban on Elon Musk’s Boring Company Flamethrower, VERGE (Jan. 29, 2018, 6:15 PM), https://www. theverge.com/2018/1/29/16948090/elon-musk-boring-company- — lamethrower- cali — ornia-sales-ban-miguel-santiago [https://perma.cc/ES89-AYAM].

2. Elizabeth Howell, Facts About SpaceX’s Falcon Heavy Rocket, SPACE.COM (Feb. 21, 2018, 8:25 PM), https://www.space.com/39779- — alcon-heavy- — acts.html [https://perma.cc/6T8S-CUA4] (“On that debut test — light, the Falcon Heavy met almost all o — its major objectives, including (notably) — lying company — ounder and CEO Elon Musk’s Tesla Roadster, carrying a mannequin named ‘Starman,’ to space.”).

3. David Griner, With a $0 Ad Budget, Tesla Just Pulled O

One o — the Greatest Marketing Stunts Ever, ADWEEK (Feb. 7, 2018), http://www.adweek.com /brand-marketing/with-a-0-ad-budget-tesla-just-pulled-o —

-one-o — -the-greatest- marketing-stunts-ever/ [https://perma.cc/Y45Q-7S4L ] (“Elon Musk pulled o —

a double marketing coup on Tuesday with the — irst success — ul test launch o — his Falcon Heavy rocket, the — lagship o — his private space- — light company SpaceX, and the subsequent debut o — its payload—a Tesla Roadster driven by a dummy nicknamed Starman—as the — irst car in space.”).

1. Henneke Weitering, Elon Must Unveils ‘Starman’ in Tesla Roadster Launching on SpaceX’s Falcon Heavy Rocket, SPACE.COM (Feb. 5, 2018, 11:07 AM), https://www.space.com/39593-starman-aboard-tesla-roadster-spacex- — alcon- heavy.html [https://perma.cc/F47S-FT4L] (“[I]n a series o — Instagram photos captioned ‘Starman in a Red Roadster,’ Musk debuted a dummy wearing an o —

icial SpaceX spacesuit, buckled up and apparently ready to blast o —

on a mission to Mars.”).

1. Mimi Launder, Why It Says ‘Don’t Panic’ on the Dashboard o

   the Car Elon Musk Just Shot Toward Mars, INDEPENDENT (Feb. 2018), https://www.indy100.com/article/elon-musk-spacex-starman-tesla-roadster-dont- panic-car- — alcon-heavy-launch-timelapse-8198921 [https://perma.cc/YML2-SG2G] (explaining that “Don’t Panic” is a re — erence to Hitchhiker’s Guide to the Galaxy, a book by Douglas Adams that has become a cult classic — or its tongue-in-cheek approach to the meaning o — li — e, the universe, and everything).

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radio.127 While some have lauded Musk

or mesmerizing the world with this Starman stunt,128 others have blasted him — or throwing away money129 and — or potentially contaminating Mars with Earthly microbes.130 More troubling — or terrestrial purposes is the — act that Musk is launching cars into space when he is unable to deliver them on Earth, perhaps to divert attention away — rom Model 3 production delays.131 Flamethrowers and Starman aside, since reports came out that Tesla is burning cash at the rate o — roughly $8,000 a minute,132 it is sa — e to assume that Tesla needed the money that it raised — rom its Model 3 campaign to help — inance their expensive operations.133 Moreover, its economic signi — icance and consumer-protection concerns are no di —

erent regardless o —

Elon Musk’s privately held intentions. Concerns about Tesla’s illusory promises to Reservation Holders and — ailure to provide material in — ormation to investors134 seem to pale in comparison

1. James Dean & Emre Kelly, Floating Through Space, SpaceX’s ‘Starman’ Mesmerizes the World, FLA. TODAY (Feb. 7, 2018, 4:11 PM), https://www. — lorida today.com/story/news/2018/02/07/ — loating-through-space-spacexs-starman- mesmerizes-world/316398002/ [https://perma.cc/NMY4-C6PN] (“Just like the car’s sound system playing David Bowie’s ‘Space Oddity,’ a song about an astronaut who is lost — orever to the void — a song that can’t be heard in the vacuum o —

space — the goal was to mesmerize.”).

1. Id.
2. Jason Davis, Let’s Talk About Elon Musk Launching His Tesla Into Space, PLANETARY SOC’Y: BLOG (Feb. 5, 2018), http://www.planetary.org/blogs/jason- davis/2018/20180205-space-tesla.html [https://perma.cc/3KUN-GRLZ] (“[R]ather than throwing away a per — ectly good supercar, Musk could have donated it to charity — or auction. The carbon — ootprint and — actory labor used to build the car will be destroyed — or no reason. SpaceX could have also asked i — anyone wanted to gamble a satellite — or this high-risk mission, though integrating satellites to a rocket isn’t trivial and SpaceX probably wants to avoid the logistics.”).

3. Id. (“NASA goes to great lengths sterilizing spacecra

   t designed to land on Mars, in order to make sure there’s no chance o — Earthly microbes contaminating the sur — ace. Such a contamination could harm existing li — e and muddle scienti — ic e —

orts to search — or said li — e.”).

1. Vlad Savov, Sending a Tesla into Space Wasn’t Such a Dumb Idea, VERGE (Feb. 7, 2018, 6:47 AM), https://www.theverge.com/tldr/2018/2/7/16984284/tesla- space- — alcon-heavy-launch-elon-musk [https://perma.cc/REN9-QKMV] (“[P]lus this pomp is helping divert attention — rom Tesla’s recent Model 3 production delays. It’s the greatest publicity stunt we’ve seen in a long time.”).
2. Gina Hall, Report: Tesla Spends About $8,000 per Minute, SILICON VALLEY BUS. J. (Nov. 27, 2017, 1:10 PM), https://www.bizjournals.com/sanjose/ news/2017/11/22/tesla-cash-burn-tsla-model-3-roadster-truck.html [https://perma.cc/5T5N-9L7P].
3. Id.
4. See, e.g., Clement Thibault, 3 Reasons Why Tesla Shares Keep Pushing Higher, INVESTING.COM (Feb. 22, 2017, 1:27 AM), https://www.investing.com/

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with Musk’s bravado.135 Moreover, it’s not just Musk who has

ound a way to raise money without regulations. In 2017, investors contributed $3.7 billion in 235 unregulated “initial coin o —

erings.”136 As more and more ordinary investors select opportunities that are not regulated by the SEC, we need to rethink our 1930s-era regulatory strategy — or the Internet era. This Article will detail some o — our — inancial regulatory insu —

iciencies.137 But be — ore it concludes with policy prescriptions — or our economic — uture,138 Part II reminds us that innovations (including — inancial ones) are necessary i — we are to overcome some o — the biggest problems — acing society today. Regulating against innovation prevents progress as well as — raud. A more nuanced approach is needed to continue protecting investors and consumers in a rapidly changing world.

II. A MARKET FOR ELECTRIC VEHICLES

Whether hype,  --- unding, or both, Tesla’s historic campaign seems to have solved the multi-sided market problem presented by EVs. EVs become more valuable as more EV resources like charging stations come online across America.139 But it does not make sense to build charging stations when there are no cars. This is a “chicken-and-egg” problem.140 Elon Musk cracked it with Hyper --- unding, which simultaneously

analysis/what%27s-pushing-tesla%27s-share-price-and-market-cap-higher- 200176388 [https://perma.cc/TU84-TPRJ] (“Laudatory language and illusory promises can only take a stock so high.”).

1. Michael Lewitt, Tesla Shareholders: Are You Drunk on Elon Musk’s Kool- Aid?, FORBES (Oct. 13, 2017, 10:46 AM), https://www. — orbes.com/sites/ michaellewitt/2017/10/13/tesla-shareholders-are-you-drunk-on-elon-musks-kool- aid/#4d9a753b2e2 — [https://perma.cc/2LWQ-MDP5].

2. See in

   ra Section III.D.

3. See in

   ra Part III.

4. See in

   ra Conclusion.

5. An In

   rastructure — or Charging Electric Vehicles Takes Shape, ECONOMIST (Sept. 7, 2017), https://www.economist.com/news/business/21728671-reliable- network-should-not-prove-insurmountable-roadblock-in — rastructure-charging [https://perma.cc/Z6DR-CQBD].

6. See generally Bernard Caillaud & Bruno Jullien, Chicken & Egg: Competition Among Intermediation Service Providers, 34 RAND J. ECON. 309 (2003) (examining the “chicken and egg” problem and how in order to attract one group, an intermediary needs participation — rom a larger number o — other plat — orm participants, who in turn are willing to participate only i — they expect the

ormer group to do so too); see also Jean-Charles Rochet & Jean Tirole, Plat — orm Competition in Two-Sided Markets, 1 J. EURO. ECON. ASS’N 990 (2003).

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proves there is mass-market demand

or EVs and provides the capital to build them and their charging stations. Hyper — unding may have been the best or only way to manu — acture an EV — or the masses. To succeed, Tesla needs to simultaneously build a national EV charging network and make and sell enough EVs to make that EV charging network pro — itable.141 Knowing this, Musk might have used Hyper — unding to prove the demand — or his EVs will support others’ investment in charging networks.142 To put this in economic terms, Hyper — unding might be a — inancial solution to multi-sided market problems.

 A.    Multi-Sided Market Problems

 The economic literature has long recognized the di ---

iculty in creating a new marketplace that requires simultaneously attracting both buyers and sellers. For a market to be two- sided, it requires more than just the existence o — a buyer and a seller.143 Traditionally, this is called a “two-sided” market problem,144 but more recent research re — ers to this situation as a “multi-sided” market (suggesting that the same economics apply where there are more than one side to build in creating a new market).145 In a nutshell, multi-sided markets present a

1. Michael Holder, Does the Power Grid Have Enough Juice to Keep Up With EV Sales?, GREENBIZ (May 10, 2017, 2:20 AM), https://www.greenbiz.com/ article/does-power-grid-have-enough-juice-keep-ev-sales [https://perma.cc/6RMT- DTDC].

2. Fred Lambert, Tesla’s Supercharger Expansion is in Full Swing Ahead o

Model 3 Production, ELECTREK (June 1, 2017, 5:28 AM), https://electrek.co/ 2017/06/01/tesla-supercharger-expansion-model-3/ [https://perma.cc/9SN2-EQZS] (observing that Tesla is taking the EV charging station expansion seriously in anticipation o — the release o — Model 3).

1. Jean-Charles Rochet & Jean Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. ECON. 645, 646 (2006) (“Two-sided (or more generally multi- sided) markets are roughly de — ined as markets in which one or several plat — orms enable interactions between end-users, and try to get the two (or multiple) sides ‘on board’ by appropriately charging each side. That is, plat — orms court each side while attempting to make, or at least not lose, money overall. Examples o — two- sided markets readily come to mind. Videogame plat — orms, such as Atari, Nintendo, Sega, Sony Play Station, and Microso — t X-Box, need to attract gamers in order to persuade game developers to design or port games to their plat — orm, and they need games in order to induce gamers to buy and use their videogame console.”).

2. See, e.g., Marc Rysman, The Economics o

   Two-Sided Markets, 23 J. ECON. PERSPECTIVES 125, 126 (2009).

3. Robert Seamans & Feng Zhu, A Simple Model o

   a Three-Sided Market

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“chicken-and-egg problem.”146 Eisenmann, Parker, and Van Alstyne o —

er twelve examples o — two-sided networks.147 Notably, they recognize that plat — orms (or marketplaces) can be either proprietary or shared.148 Proprietary plat — orms have a clear subsidy side (a group o — users who are highly valued by users on the money side) and a clear money side (a group o — users who are willing to pay — or access to subsidy-side users).149 Conversely, shared plat — orms tend to lack a subsidy side (meaning that all users are willing to pay — or their own access to shared plat — orms).150 An example o — a proprietary network is a health maintenance network (HMO), which is provided by a proprietary plat — orm such as Kaiser Permanente, a health insurance company. There, doctors subsidize patients by accepting a lower rate — or services rendered than they could command in an open market in return — or access to a higher volume o — patients.151 Patients thus get cheaper health care, which encourages them to join the system. This in turn makes access to that network more valuable — or doctors, who would then be willing to — urther lower their rates in order to access that network, which — urther reduces the cost o — health care — or patients, thereby driving more patients onto the network. Economists call this a positive

(Oct. 16, 2013) (unpublished manuscript), https://ssrn.com/abstract=2341356 [https://perma.cc/ZE59-PYPZ] (“Existing multi-sided market literature — ocuses on pricing dynamics across two-sided markets. . . . In this paper, we present a simple, stylized model o — a three-sided market.”).

1. Rochet & Tirole supra note 140, at 990 (“Buyers o

   video game consoles want games to play on; game developers pick plat — orms that are or will be popular among gamers. Cardholders value credit or debit cards only to the extent that these are accepted by the merchants they patronize; a —

iliated merchants bene — it

rom a widespread di —

usion o — cards among consumers. More generally, many i —

not most markets with network externalities are characterized by the presence o

two distinct sides whose ultimate bene

it stems — rom interacting through a common plat — orm. Plat — orm owners or sponsors in these industries must address the celebrated ‘chicken-and-egg problem’ and be care — ul to ‘get both sides on board.’”).

1. Thomas Eisenmann et al., Strategies

   or Two Sided Markets, 84 HARVARD BUS. REV., Oct. 2006, at 92, 96 (noting that PC operating systems, online recruitment, telephone yellow pages, web search, health maintenance organizations, video games, shopping malls, application serves, Wi-Fi equipment, DVDs, associations o — realtors, gas-powered engines, and universal product codes are examples o — two-sided networked markets).

2. Id.
3. Id. at 95–96.
4. Id.
5. Id. at 95.

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cross-side network e

ect, where money-side users will pay increasing amounts to reach an increasing number o — subsidy- side users.152 A related but distinct e —

ect occurs when increasing subsidy-side users increases demand — or additional subsidy- side users to join the network. This is called a positive same- side network e —

ect.153 For example, Facebook’s business model is to sell users’ views to advertisers.154 But Facebook users are not accessing that network to enjoy advertisements; rather, they want to connect with — riends online.155 There — ore, a Facebook user’s value o — that network is correlated with the number o — other subsidy-side users on that network. A network o — one is worthless, whereas a network that allows one to reach the entire world is maximally valuable. The advertisers, who are subsidizing the user’s ( — ree) experience, also bene — it — rom the same-side network e —

ect, and should be willing to pay more

or advertisements to the broader network on Facebook. This allows Facebook to — und improvements in the user experience, and thus drive more users to its network. But while cross-side e —

ects are generally positive, same-side e —

ects are o — ten negative because they create competition and network congestion.156 As a gasoline-powered-automobile owner, would

1. Id. at 96 (“These plat

   orms exhibit two types o — network e —

ects, which may be either positive or negative: A same-side e —

ect, in which increasing the number o — users on one side o — the network makes it either more or less valuable to users on the same side; and a cross-side e —

ect, in which increasing the number o — users on one side o — the network makes it either more or less valuable to the users on the other side. Cross-side network e —

ects are typically positive, but they can be negative (TV viewers pre — erring — ewer ads). Same-side network e —

ects are o — ten negative (sellers pre — erring — ewer rivals in a B2B exchange), but they may be positive (Microso — t Xbox owners valuing the — act that they can play games with

riends).”).

1. Id. at 95.
2. Lynn C. Percival, IV, Public Policy Favoritism in the Online World: Contract Voidability Meets the Communications Decency Act, 17 TEX. WESLEYAN L. REV. 165, 177 (2011).
3. Using Social Media to Keep in Touch, PEW RESEARCH CTR. (Dec. 22, 2011), http://www.pewresearch.org/ — act-tank/2011/12/22/using-social-media-to- keep-in-touch/ [https://perma.cc/F6HR-LP5Y] (Roughly two-thirds (67%) o — social media users say that staying in touch with current — riends and — amily members is a major reason they use these social media sites like Facebook, Twitter, MySpace, or LinkedIn.)
4. See Stephen P. King, Two-Sided Markets, 46 AUSTL. ECON. REV. 247, 248 (2013) (“[I] — consumers use a store, congestion that occurs when the store becomes crowded reduces customer amenity and is a negative externality between participants on the same side o — the plat — orm.”).

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you pre

er to have more or — ewer cars trying to access the same gas station that you use? Setting aside the ex ante e —

ect that a lack o — car owners might have prevented the gas station — rom being built in the — irst place, on an ex post basis you would pre — er less competition — or gasoline (and less tra —

ic), and thus you experience a negative same-side e —

ect in this network. This Section will now present three generally accepted economic de — initions o — multi-sided markets and show that the market — or EVs meets that de — inition. Additionally, this Section will show that the market — or EVs is analogous to other markets that we know are multi-sided. Rysman de — ines a market as multi-sided where agents interact through an intermediary and thus create value or costs — or each other. Rysman two-sided markets include search engines (connecting advertisers and searchers via the Google AdWords plat — orm), traditional marriage matchmakers (connecting heterosexual men and women through a dating- coach intermediary), and video games (connecting game developers and game players through the Xbox plat — orm).157 In other words, Rysman — ocuses on the intermediary, and the de — ining characteristic o — a Rysman multi-sided market is that neither agent is interested in the plat — orm i — the other party is not interested (e.g., advertisers will not pay to be — eatured on a website that gets no visitors, heterosexual men will not pay — or a dating web app that — eatures no women, and gamers will not purchase a console that has no games). Rochet and Tirole — ocus on pricing structure when de — ining multi-sided markets. Like Rysman, Rochet and Tirole require a plat — orm, but Rochet and Tirole also require that the plat — orm allows one side o — the market to subsidize the other.158 For

1. Rysman, supra note 144, at 125. A two-sided market is “one in which 1) two sets o — agents interact through an intermediary or plat — orm, and 2) the decisions o — each set o — agents a —

ects the outcomes o — the other set o — agents, typically through an externality.” Id. Note that economists generally use “externality” to mean a consequence o — economic activity experienced by unrelated third parties that can be positive or negative. In this sense, a — actory that legally dumps polluting waste into a river that damages the health o — riparian residents has created a negative externality. Here, Rysman is using the term somewhat di —

erently to describe positive externalities between economically related market participants. For example, a video game developer — or the Sony PlayStation plat — orm will bene — it i — Sony creates a “positive externality” — or the video game developer by advertising and selling more PlayStations and thus broadening the potential customer base — or the video game.

1. Rochet & Tirole, supra note 143, at 664–65 (“A market is two-sided i

   the

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example, Tinder charges ten dollars to people under thirty and twenty dollars to people over thirty.159 In this way, Tinder’s older users pay a premium that subsidizes its younger users. One might thereby in — er that older users o — dating apps want younger users to also be on the plat — orm. In this way, Tinder brings both sides on board. Eisenmann, Parker, and Van Alstyne — ocus on the value chain when de — ining multi-sided markets.160 In a traditional company, value moves — rom cost to revenue. For example, Nestle incurs costs — or cocoa, labor, equipment, logistics, and advertising, and creates value by selling each candy bar — or more than it costs. In multi-sided markets, there are costs and value on all sides. For example, Tinder incurs marginal costs

or each additional user, and it also receives marginal revenue

rom each additional user. Let us assume the cost per user is twelve dollars. In this case, each user over age thirty pays twenty dollars and costs twelve dollars, resulting in eight dollars marginal revenue. Meanwhile, each user under age thirty pays ten dollars and costs two dollars, resulting in minus two dollars marginal revenue. This negative marginal revenue makes business sense only i — it is subsidized by an increasing number o — pro — itable new customers. Regardless o — which o — the three de — initions we apply here, EVs operate in a multi-sided market. Applying the — irst part o — the two-part Rysman de — inition,161 EVs require at least two sets o — agents: sellers o —

vehicles and sellers o

electricity. The vehicles cannot run and are useless without electricity. Moreover, the nature o — vehicles

plat

orm can a —

ect the volume o — transactions by charging more to one side o — the market and reducing the price paid by the other side by an equal amount; in other words, the price structure matters, and plat — orms must design it so as to bring both sides on board.”).

1. Tinder’s co

   ounder Sean Rad expressly stated that “[o]ur intent is to provide a discount — or our younger users.” Maya Koso —

, Sean Rad Gave a Cringeworthy De — ense to Why Tinder Charges its Older Users More Money, BUS. INSIDER (May 5, 2016), http://www.businessinsider.com/sean-rad-explains-age- based-tinder-plus-pricing-2015-5 [https://perma.cc/NGJ5-E572].

1. Eisenmann et al., supra note 147, at 2 (“[T]wo-sided networks di

er — rom [traditional product and service o —

erings] in a — undamental way. In the traditional value chain, value moves — rom le — t to right: To the le — t o — the company is cost, to the right is revenue. In two-sided networks, cost and revenue are both to the le — t and the right, because the plat — orm has a distinct group o — users on each side. The plat — orm incurs costs in serving both groups and can collect revenues — rom each, although one side is o — ten subsidized.”).

1. Rysman, supra note 144, at 125.

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is to be ambulatory, and their value is positively correlated with their range. There — ore, electricity must be available — or cars not just in major metropolitan areas but also outside and between these areas, so that the vehicles may be driven — rom one city to another. Tesla recognizes this and has been trying to build up EV charging networks across America to drive up demand — or its cars.162 Second, the actions o — sellers o — vehicles directly a —

ect the sellers o — electricity — or vehicles, and vice versa. EV manu — acturers can decide whether to have open or closed standards — or their cars’ charging capabilities. While SAE J1772163 has been adopted as the North American standard — or electrical connections — or EV,164 Tesla built a network o — “Supercharger” electric charging stations that do not comply with SAE J1772 and there — ore do not provide positive externalities — or other EV manu — acturers such as Nissan, Chevrolet, and Fisker.165 Under the Rochet and Tirole de — inition, the inquiry — ocuses on whether the plat — orm can en — orce a cross-subsidy. Although scholars have suggested that “open”166 or “shared”167 two-sided network plat — orm providers (as opposed to “proprietary”168 ones) cannot en — orce cross-subsidies, the EVs still seem to be a multi-sided market. While books and records o — EV charging station providers are likely unavailable — or the public to review, there is strong circumstantial evidence. First, Tesla began building the two-sided EV market by subsidizing EV buyers with — ree electricity, even though it invested millions or billions o — dollars into its extensive Supercharger network.169 Second,

1. Tesla Revs Up: Coast-to-Coast Charging Stations by Next Year, ADAGE (May 30, 2013), http://adage.com/article/news/tesla-announces-coast-coast- charging-stations/241793/ [https://perma.cc/HY2Q-864T].
2. SAE Recommended Practice J1772, SAE Electric Vehicle and Plug in Hybrid Electric Vehicle Conductive Charger Coupler J1772_201202, SAE INT’L, (Feb. 21, 2012), http://standards.sae.org/j1772_201202/ [https://perma.cc/WX72- CZFA].
3. Id.
4. See Joel Hruska, Tesla’s New Superchargers Leave Roadster, Other EV Owners Flat, EXTREMETECH.COM (Sept. 27, 2012, 7:30 AM), https://www. extremetech.com/extreme/136903-teslas-new-superchargers-leave-roadster-other- ev-owners- — lat [https://perma.cc/D4JU-95VW].
5. Ramon Casadesus-Masanell & Gaston Llanes, Investment Incentives in Open-Source and Proprietary Two-Sided Plat — orms, J. ECON. & MGMT. STRATEGY 1, 12, 15 (2013).
6. Id.
7. Id. at 11–14.

8. See Daniel Sparks, Tesla Motors, Inc. Likely to O

er Free Charging on

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1062 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

Tesla has apparently managed to reverse their initial cross- subsidy. Tesla initially o —

ered — ree Supercharger access to purchasers o — its EVs, but it has reversed that policy and now charges users — or electricity.170 Analysts have even suggested that Tesla has made its Supercharger centers pro — itable.171 Tesla has seemingly managed to control subsidies across its EV-charging network. The Eisenmann, Parker, and Van Alstyne de — inition172 also accords that EVs are in a multi-sided market: Tesla incurs costs and generates value on both sides o — the EV market. Tesla has invested billions o — dollars into its Supercharger network, which re — lects a signi — icant cost. Tesla has also invested billions o — dollars into developing new products.173 In addition, Tesla derives value — rom both sides o — this market. As mentioned above, Tesla now appears to be pro — itably charging its EV station users — or electricity. Tesla also earns gross margins o — about 24 percent on sales o — its cars.174 This is clearly not the traditional single-sided value chain where value moves — rom cost to value; rather, this is an Eisenmann-Parker- Van Alstyne multi-sided market where costs and value come

rom both sides. In addition, EVs are also highly analogous to the recognized two-sided market — or gasoline-powered engines. In

Model X, MOTLEY FOOL (Sept. 10, 2015, 2:00 PM), https://www.

ool.com/ investing/general/2015/09/10/tesla-motors-inc-likely-to-o —

er- — ree-charging- — or.aspx [https://perma.cc/KH3M-FC7U] (“Tesla’s Supercharger network is a key selling point — or Tesla’s — ully electric vehicles. By placing these high-speed charging stations, which can charge a Tesla battery by about 80% in just 40 minutes, strategically along major routes, the company has essentially enabled travel to almost anywhere in the United States.”).

1. Brian Silvestro, No More Unlimited Free Charging

   or New Tesla Customers, ROAD & TRACK (Nov. 7, 2016), http://www.roadandtrack.com/new- cars/car-technology/news/a31463/tesla-supercharger-station-no-longer- — ree/ [https://perma.cc/WUF3-KG47].

2. Siddharth Dalal, Superchargers as a Pro

   it Center — or Tesla, SEEKING ALPHA (Dec. 31, 2013), http://seekingalpha.com/article/1923251-superchargers-as- a-pro — it-center- — or-tesla [https://perma.cc/ZZZ3-V2HR].

3. Eisenmann et al., supra note 147, at 3.

4. Tesla’s Giga

   actory alone costs $5 billion to build. See Great Speculations, Opinion, Giga — actory Will Cost Tesla $5 Billion But O —

ers Signi — icant Cost Reductions, FORBES (Mar. 11, 2014, 8:46 AM), https://www. — orbes.com/sites /greatspeculations/2014/03/11/giga — actory-will-cost-tesla-5-billion-but-o —

ers- signi — icant-cost-reductions/#4c4b3a432ebe [https://perma.cc/H32N-FB67].

1. Vincent Wolters, Tesla: A Closer Look at Margins and Pro

   itability, SEEKING ALPHA (May 23, 2017), https://seekingalpha.com/article/4075701-tesla- closer-look-margins-pro — itability [https://perma.cc/5HCV-ECC6].

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2018] HYPERFUNDING 1063

that market, auto owners once enjoyed many bene

its (or subsidies) — rom — ueling stations, such as personal service, — ree windshield cleaning and tire in — lation, and other services. Now that the market — or — ueling stations is so competitive that market participants do not have pricing power or the ability to en — orce cross-subsidies, the subsidies to car owners seem limited to less expensive bene — its, such as — ree restrooms along the highway, that — ueling station plat — orm providers such as Exxon and Shell provide to entice buyers. Likewise, when EVs and charging stations were nascent and competition was scarce, many companies o —

ered — ree charging. Now that the market is more competitive, EV owners pay — or electricity out o — pocket—although, curiously, advertisers may enter as a third side o — this multi-sided market to subsidize the cost o —

electricity

or EV owners in return — or their views.175 In addition to the obvious analogy between gasoline-powered motors and electricity-powered motors, the early history and emerging structure o — the EV market is very similar to the established multi-sided market — or gasoline vehicles.

 B.    Hyper --- unding Solutions

MIT Sloan economist Andrei Hagiu outlines176  --- our challenges  --- aced by multi-sided markets177 (which he calls multi-sided plat --- orms or “MSPs”): (1) the number o ---  sides to

1. Some EV-charging stations are now o

ering digital advertising such that advertisers can subsidize EV-charging station users in exchange — or their views. This may represent an additional complexity in multi-sided markets that has not yet been explored in the economics literature. See, e.g., The First EV Charging Station with Digital Advertising, EV STRUCTURE, http://evstructure.com/ad-kit.pd —

(last visited Feb. 20, 2018) [https://perma.cc/25M4-UPWL].

1. Andrei Hagiu, Strategic Decisions

   or Multisided Plat — orms, MIT SLOAN MGMT. REV., Winter 2014, at 72.

2. Hagiu identi

   ies the — ollowing MSPs as exemplars o — the category: Alibaba.com, eBay, Taobao and Rakuten (buyers and sellers); Airbnb (dwelling owners and renters); the Uber app (pro — essional drivers and passengers); Facebook (users, advertisers, third-party game or content developers and a —

iliated third-party sites); Apple’s iOS (application developers and users); Google’s Android operating system (handset manu — acturers, application developers and users); Sony’s PlayStation and Microso — t’s Xbox gaming consoles (game developers and users); American Express, PayPal and Square (merchants and consumers); shopping malls (retail stores and consumers); Fandango (cinemas and consumers); and Ticketmaster (event venues and consumers). Id. at 71.

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1064 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

bring on board; (2) design; (3) pricing structure; and (4) governance rules.178 Hagiu, agreeing with Rochet and Tirole,179 describes the

irst di —

iculty as an “inherent chicken-and-egg problem: No side will join with the other or others. Overcoming the chicken- and-egg problem is one o — the most di —

icult challenges — or many MSPs.”180 Rysman observed that some — irms solve this by beginning with a one-sided model and switching to a two-sided model.181 For example, Amazon began as a standard online book retailer be — ore introducing the Amazon Marketplace.182 But other — irms do not have this luxury. For example, when Microso — t entered the video game industry with the Xbox in 2001, it was not able to leverage its entrenched dominance in the operating system market.183 Instead, Microso — t had to provide the market need — or Xbox by selling to both sides o — the market — rom inception: Microso — t aggressively priced and marketed the Xbox while its newly created subsidiary Microso — t Game Studios184 developed exclusive titles — or the Xbox, such as Halo,185 that drove demand to the plat — orm. This is a very expensive and uncertain solution to the chicken-and- egg problem, as evidenced by the — act that the Xbox may have never been pro — itable — or Microso — t.186 Tesla ingeniously solved the chicken-and-egg problem by using Hyper — unding to simultaneously raise money and prove demand. Instead o — spending millions o — dollars to prove

1. Hagiu de

   ines MSPs as “technologies, products or services that create value primarily by enabling direct interactions between two or more consumer or participant groups” where “the value to customers on one side o — the plat — orm typically increases with the number o — participating customers on the other side.” Id. at 71–72. This is essentially the Rysman de — inition limited to plat — orms that have cross-side network e —

ects (which would typically not include shared or open plat — orms).

1. See id. at 72.
2. Id.
3. Rysman, supra note 144, at 132.
4. Id.
5. See Hagiu, supra note 176, at 73–74.

6. Microso

   t Corporation, Annual Report (Form 10-K) (Aug. 25, 2006).

7. Id.

8. Matt Roso

, Microso — t’s Board Is Now Worried About How Much Money Xbox Will Lose, BUS. INSIDER (Apr. 21, 2011, 2:45 PM), http://www. businessinsider.com/next-xbox-may-be-pro — itable-on-day-one-2011-4 [https://perma.cc/3BMA-G6H7]; see also Daemon Hat — ield, Xbox 360 Still Not Pro — itable, IGN (July 20, 2007), http://www.ign.com/articles/2007/07/20/xbox-360- still-not-pro — itable [https://perma.cc/U5NX-ULDP].

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2018] HYPERFUNDING 1065

demand, as Microso

t did, Tesla actually raised millions o —

dollars while proving demand

or the Model 3.187 The stock market responded very — avorably to this event. Be — ore the presale, on Thursday, March 31, 2016, TSLA closed at $229.77 per share.188 The next day, the stock opened over 6 percent higher, and it rose to a high o — $260.82 per share on Friday, April 8—a remarkable 12.5 percent increase—upon news that Tesla presold almost 325,000 vehicles — or $14.5 billion in potential sales that week.189 In preselling the Model 3, Tesla not only improved its working capital and stock value, but also encouraged investors to invest in TSLA. Within a month o — its success — ul Hyper — unding campaign, Tesla — iled an S-3 statement190 to sell up to $2 billion in additional debt and equity securities.191 In its related press release, Tesla stated, “Because o — the overwhelming demand that it has received — or Model 3, Tesla intends to use the net proceeds — rom this o —

ering to accelerate the ramp o — Model 3.”192 Then, just a — ew months a — ter

1. See, e.g., Bill Vlasic, Tesla’s New Model 3 Jump-Starts Demand

   or Electric Cars, N.Y. TIMES (Apr. 1, 2016), https://www.nytimes.com/2016/04/ 02/business/teslas-new-model-3-jump-starts-demand- — or-electric-cars.html?_r=0 [https://perma.cc/JK5H-HQ6W] (“[T]he Tesla’s introduction is a sign that latent demand — or electric cars could translate into big sales in the showroom down the road.”).

2. Historical Data

   or TSLA Stock, YAHOO! FIN., https:// — inance.yahoo.com /quote/TSLA/history?period1=1451631600&period2=1460095200&interval=1d& — il ter=history& — requency=1d (last visited Feb. 20, 2018) [https://perma.cc/5PVU- TP42].

3. Id.; see also Lucas Mearian, Tesla’s Model 3 Now Has 325k Pre-Orders – and $14.5B in Potential Sales, COMPUTERWORLD (Apr. 7, 2016, 9:16 AM), http://www.computerworld.com/article/3053553/car-tech/teslas-model-3-now-has- 325k-pre-orders-and-145b-in-potential-sales.html [https://perma.cc/54AL-AQ3A].
4. Tesla Motors, Inc., Registration Statement (Form S-3) (May 18, 2016). An S-3 statement is a securities registration — orm issued by the SEC. It can only be used by United States-based companies that have been required to report under the Securities Exchange Act o — 1934 — or a minimum o — twelve months immediately preceding the — iling and have also timely — iled all required reports. In the twelve months prior to — illing out the — orm, a company must have met all debt and dividend requirements. PRACTICAL LAW CORP. & SEC., REGISTRATION STATEMENT: FORM S-3 (2017).

5. Richard Saintvilus, Tesla Issues $2 Billion O

ering To Fund Model 3 (TSLA), INVESTOPEDIA (May 19, 2016, 7:12 AM), http://www.investopedia.com/ articles/markets/051916/tesla-issues-2-billion-o —

ering- — und-model-3-tsla.asp [https://perma.cc/AM4R-UYYX].

1. Tesla Raising Money to Accelerate the Ramp o

   Model 3, MARKETWIRED (May 18, 2016), http://www.marketwired.com/press-release/tesla-raising-money- to-accelerate-the-ramp-o — -model-3-2126458.htm [https://perma.cc/QL4L-CUH3].

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1066 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

Hyper

unding the Model 3, Tesla — iled an S-4 stating that “Tesla is currently planning to raise additional — unds by the end o — this year, including through potential equity or debt o —

erings.”193 Speci — ically, “[s]uch additional — unds would be used primarily — or tooling, production equipment and construction o — the Tesla’s Model 3 production lines, equipment to support cell production at Tesla’s Giga — actory, as well as new Tesla retail locations, service centers and Supercharger locations.”194 In other words, once Tesla proved the demand — or one side o — its EV MSP, it — ound it much easier to raise money

or the other side o — that MSP.195 Solving the chicken-and-egg problem is the most substantial contribution o — Hyper — unding to addressing challenges in two-sided markets. But Hyper — unding also addresses the challenges o — plat — orm design, pricing, and governance. For example, many recent MSPs have designed their plat — orms to subsidize customers with advertisers’ dollars, where advertisers are essentially paying — or access to eyeballs. But this strategy can inter — ere with consumer privacy196 and relevancy.197 Hyper — unding avoids the need to subsidize the EV-charging market with advertising dollars, even as an initial strategy, by avoiding the “mistake” o —

designing “in

avor o — the side that brings in the largest share o — current revenues.”198 Instead, the vast amount o — capital raised by Hyper — unding allowed Tesla to “solve trade-o —

s in

avor o — the participant group that is more important to the

1. Tesla Motors, Inc., Registration Statement (Form S-4) (Aug. 31, 2016) [hereina — ter Tesla, Form S-4]. The SEC — orm S-4 is used in relation to a business merger or exchange o —

er. PRACTICAL LAW CORP. & SEC., REGISTRATION STATEMENT: FORM S-4 AND BUSINESS COMBINATIONS (2017).

1. Tesla, Form S-4, supra note 193, at 134.
2. See Cash-Strapped Tesla Needs to Raise More Money This Year, FORTUNE (Aug. 31, 2016), http:// — ortune.com/2016/08/31/tesla-raise-money/ [https://perma. cc/325S-LXWJ]; see also John Kilhe — ner, Tesla Motors Inc (TSLA) Needs More Cash — or Giga — actory, Model, 3, INVESTORPLACE (Aug. 31, 2016, 11:23 AM), http://investorplace.com/2016/08/tsla-tesla-stock-needs-more- cash/#.WKCmCYWcGmQ [https://perma.cc/9SK5-YB8S].

3. For example, Microso

   t introduced do-not-track — eatures in Internet Explorer 9 in response to demands — or more consumer privacy, although this disrupted the advertiser-subsidy model o — many Internet-based MSPs. See Hagiu, supra note 176, at 75.

4. For example, eBay discontinued its Featured First advertising programs, which allowed advertisers to pay — or higher-ranked search results, because buyers pre — erred to see the most relevant product listings — irst. See id.
5. Id.

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2018] HYPERFUNDING 1067

MSP’s long-term success.”199 Hyper

unding also allowed Tesla to solve its pricing problem by generating real-world supply and demand data. Tesla apparently used this data (e.g., the high demand — or the Model 3) to determine it was no longer necessary to subsidize EV purchasers by o —

ering — ree charging

or li — e.200 Tesla also seems to have leveraged the success o — the Model 3 Hyper — unding campaign to en — orce its MSP governance rules, which exclude non-Tesla EVs — rom using its Supercharger network.201 Presumably, Tesla may have provided access to J1772 (ISO-compliant, non-Tesla) EVs i — this were necessary to build that side o — the network.202 It is perhaps ironic that in order to — inance a multi-sided market, Tesla eschewed conventional plat — orms and instead developed a direct-marketing scheme. The hallmark o —

Hyper

unding—its direct-to-consumer approach—is oddly reminiscent o — the earliest joint-stock companies.203 Yet its

1. Id.
2. Bob Sorokanich, Musk Says Tesla Model 3 Won’t Get Free Supercharging Access A — ter All, ROAD & TRACK (June 1, 2016), http://www.roadandtrack.com/ new-cars/ — uture-cars/news/a29367/tesla-model-3-supercharger-station- — ree-elon- musk/ [https://perma.cc/ZN74-ZXHZ]; see also Silvestro, supra note 170.
3. Alex Roy, Teslas Can Use Chargepoint, But Non-Teslas Can’t Use Superchargers, Ergo. . ., YAHOO! NEWS (Sept. 20, 2016), https://www.yahoo.com/ news/teslas-chargepoint-non-teslas-cant-130042616.html [https://perma.cc/2RUB- MFG5].

4. Opening up a proprietary MSP in the

   ace o — uncertain demand is the strategy some say destroyed Atari. BOGDAN ION PURCARU, GAMES VS. HARDWARE, THE HISTORY OF PC VIDEO GAMES: THE 80S, at 165 (2014). The Atari 2600 had no digital rights management (DRM), so anyone could produce games — or that plat — orm. The system was highly criticized — or having horrible games. In — act, Atari literally tried to buy up and bury one o — its worst games, E.T. The Extra Terrestrial, in Alamagordo, New Mexico, next to the — irst atomic bomb site, because it was not able to en — orce quality control on its open plat — orm. This massive — ailure in DRM is the subject o — the — eature-length documentary, Atari: Game Over (2014), by director Zak Penn. In what is perhaps ironic, the movie about the death o — Atari was — irst released on Xbox. See also Hagiu, supra note 176, at 76.

5. The joint stock company began in English common law at a time when the privilege o — incorporation was di —

icult to attain. Herbert A. Shannon asserts that “the general movement [to joint stock enterprise] could not take place until certain economic and legal changes had been e —

ected . . . . The legal change was the substitution o — the law o — corporations — or the law o — partnership . . . . But be — ore the legal changes o — 1844 and 1855, English law virtually prohibited joint- stock enterprise — or ordinary trading and manu — acturing purposes.” Herbert A. Shannon, Coming o — General Limited Liability, 2 ECON. HIST. 267, 267 (1931), reissued in ESSAYS IN ECONOMIC HISTORY, VOL. I 358 (E.M. Carus-Wilson, ed., 1954).

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1068 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

economics are similar to crowd

unding,204 although critically di —

erent in that Hyper — unding does not require a plat — orm. A plat — orm may prevent — raud through sel — -regulation and reputational e —

ects,205 and create trust,206 but there is no plat — orm here. Instead, we have a system that is very reminiscent o — the direct-to-investor bucket shops where

raudsters prompted the securities laws o — the 1930s.207 Prior to the October 24, 1929 “Black Tuesday” stock market crash and the resulting Great Depression, the regulation o — securities markets “was le — t almost entirely to the states,” which led to “non-existent or completely inadequate” en — orcement.208 Under this patchwork o — regulation, the o —

ering circular — or securities listed o —

exchange typically contained “very little in — ormation as to the use o — proceeds, a rather brie — description o — the securities themselves, and very — ew i — any material — acts relating to the business o — the issuer.”209 An optimistic public invested in these sketchy deals because “each company was assumed to be a potential Ford Motor Co.”210 The next Part o —

this Article will show the dangers o

Hyper — unding where every new Tesla is presumed to be the next Ford Motor Co. These dangers are even more severe where every new cryptocurrency is presumed to be the next Bitcoin.211 Nevertheless, regulators should not — orget that Tesla’s Hyper — unding made mass-market EVs a reality in America, and the blockchain technology underpinning Bitcoin could literally change the world.212 Part

1. See in

   ra Section III.B.

2. Seth Oranburg, Bridge

   unding: Crowd — unding and the Market — or Entrepreneurial Finance, 25 CORNELL J. OF L. & PUB. POL’Y 297 (2015).

3. See Li-Ling Hsua et al., Determinants o

   Success — ul Online Transactions – E —

ects o — Transaction Assurance Seal and Reputation Rating A —

ecting Trust and Purchase Intention o — Consumers, 34 HUM. SYS. MGMT. 105, 107 (2015).

1. Morris J. Cashel, Bucket Shops, 2 AM. POL. SCI. REV. 48, 48–49 (1907).

2. Thomas A. Halleran & John N. Calderwood, E

ect o — Federal Regulation on Distribution o — and Trading in Securities, 28 GEO. WASH. L. REV. 86, 86 (1959).

1. Id. at 94.
2. H.R. REP. No. 73-85, pt. 18, at 2 (1933), reprinted in 2 LEGISLATIVE HISTORY OF THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, (J.S. Ellenberger & E. Mahar, eds. 1973).

3. See, e.g., Panos Mourdoukoutas, 5 Tips

   or Finding the Next Bitcoin, Ethereum, and Ripple, FORBES (Jan. 14, 2018, 8:56 AM), https://www. — orbes.com /sites/panosmourdoukoutas/2018/01/14/5-tips- — or- — inding-the-next-bitcoin- ethereum-and-ripple/#2eca7645dcdc [https://perma.cc/TW6A-FF2W].

4. Michael Pisa & Matt Juden, Blockchain and Economic Development: Hype vs. Reality (Ctr. — or Global Dev. Pol’y Paper No. 107, 2017), https://www.cgdev.org/ sites/de — ault/ — iles/blockchain-and-economic-development-hype-vs-reality_0.pd —

[https://perma.cc/42LN-LU8M].

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2018] HYPERFUNDING 1069

III identi

ies the regulatory insu —

iciencies in Hyper — unding law and — inance, then this Article concludes with normative prescriptions — or policymakers and regulators regarding Hyper — unding.

III. HYPERFUNDING LAW & FINANCE

 Hyper --- unding is hard to categorize under existing law. Hyper --- unding is probably not issuing a security (i.e., not debt, equity, or an investment contract)213 under the predominate Howey test,214 although stranger things have been deemed securities,215 while more obvious securities like ICOs have not

ollowed securities laws.216 The Model 3 presale has similarities to the undeveloped land sales agreements that prompted the Interstate Land Sales Act o — 1968 (ILSA), but Hyper — unding in general is certainly not governed by ILSA.217

1. See Securities Act o

   1933, 15 U.S.C. § 77b (2012). (“The term ‘security’ means any note, stock, treasury stock, security — uture, security-based swap, bond, debenture, evidence o — indebtedness, certi — icate o — interest or participation in any pro — it-sharing agreement, collateral-trust certi — icate, preorganization certi — icate or subscription, trans — erable share, investment contract, voting-trust certi — icate, certi — icate o — deposit — or a security, — ractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certi — icate o — deposit, or group or index o — securities (including any interest therein or based on the value thereo — ), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to — oreign currency, or, in general, any interest or instrument commonly known as a ‘security’, or any certi — icate o — interest or participation in, temporary or interim certi — icate — or, receipt — or, guarantee o — , or warrant or right to subscribe to or purchase, any o —

the

oregoing.”).

1. SEC v. W.J. Howey Co., 328 U.S. 293, 299–300 (1946) (outlining a

   our- part test — or determining an investment contract: an investment o — money, with the expectation o — pro — it, in common enterprise, and the pro — its to come solely

rom the e —

orts o — others).

1. See in

   ra Section III.C. For example, in SEC v. W.J. Howey Co., the Supreme Court — ound the purchase o — orange groves together with service contracts an investment contract because the promoters had committed to making the orange groves productive. 328 U.S. at 299–300. However, i — the investors had been required to tend the orange groves themselves, the Court would not have

ound the land contracts to be “investment contracts” under the — ederal securities laws. Id.

1. See Public Statement, supra note 6.

2. See in

   ra Section III.D. The ILSA was enacted in 1968 to protect consumers — rom abuses in the sale o — unimproved, subdivided land. 15 U.S.C. §§ 1701–1720 (2012). Speci — ically, ILSA “was meant to prevent — raud in land sales by protecting unsuspecting and ill-in — ormed investors — rom buying undesirable land.” Zhou Jie Plant v. Merri — ield Town Ctr. Ltd. P’ship, 751 F. Supp. 2d 857, 869 (E.D. Va. 2010) (internal quotes omitted).

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1070 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

And while Hyper

unding could theoretically be used to

acilitate a Ponzi scheme, there are no — acts that show Musk perpetrated one here.218 Perhaps Hyper — unding is an interest-

ree loan.219 Regardless, — rom — inancial and securities law perspectives, Hyper — unding does not exist.220 Hyper — unding is a new, distinct way that corporations can raise money. While Hyper — unding is within the genus o — direct public market corporate — inance, Hyper — unding is distinct because it leverages the power o — the Internet to raise a large amount o — money in a brie — period o — time — rom the general public without listing on any public stock exchange or even participating on a semi-public peer-to-peer plat — orm. In — act, Hyper — unding is only possible when per — ormed by a corporation which already has such prominence and stature as to locate and attract investors without leveraging a preexisting marketplace. While the world has never seen anything exactly like Elon Musk’s incredible hal — -billion-dollar — inancing o — Tesla, per — ormed without any intermediaries and legally executed without any regulatory compliance, Hyper — unding does share aspects with preexisting modalities o — corporate — inance. Thus, the Tesla Model 3 presale is unlikely to be an isolated incident; rather, like the B&O pre — erred stock sale o — 1838, Musk’s incredible success is likely to entice other corporations to attempt similar transactions. There — ore, scholars should explore and attempt to understand the nature o — Hyper — unding and the normative and positive consequences o — its emergence onto the corporate — inance landscape. Now that Elon Musk has revealed Hyper — unding as a success — ul means o — corporate — inance, it is very likely that other corporations or even individuals will use this technique to raise money. While one might be com — ortable or even pleased that the much-loved221 Elon Musk used this technique to

inally create much-needed electric cars,222 but this same

1. See in

   ra Section III.C.2.

2. Although that appears to be economically irrational.
3. Although perhaps some state consumer protection laws apply.
4. Zachary Shahan, Why Elon Musk is Loved So Much, CLEAN TECHNICA (Feb. 10, 2016), https://cleantechnica.com/2016/02/10/why-elon-musk-is-loved-so- much/ [https://perma.cc/AZ3F-RVTV].
5. E.g., Bill Destler, Why Electric Cars Are Our Future, HUFFINGTON POST: BLOG (Oct. 1, 2012, 4:26 PM), http://www.hu —

ingtonpost.com/bill-destler/electric- cars_b_1929481.html [https://perma.cc/E9C6-VR5M]; Why EVs?, EVGO,

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technique could be used

or less auspicious ends. But there is nothing truly new under the sun.223 One might understand Hyper — unding as a variation or derivation o —

existing

inancial techniques. Regulation o — Hyper — unding might also be understood analogously to existing regulation. Hyper — unding has — acial similarities to traditional presales, crowd — unding, investment contracts, undeveloped land sales, and Ponzi schemes. While it is ultimately distinct — rom all o —

these precedents, they may in

orm whether and how to regulate Hyper — unding. Perhaps it is not necessary to regulate Hyper — unding. It is merely a tool. Tools are good means so long as they are used — or good ends. But any — inancial tool that has the power to draw a hal — -billion dollars — rom ordinary people in just over a week merits some observation and scrutiny by scholars and policymakers.224 A proactive, deliberative, nuanced consideration o — whether and how to regulate Hyper — unding will avoid reactive, impulsive, innovation-destroying regulation o — this power — ul new — inancial technique while protecting . . . investors? In the hand o — a benevolent, trustworthy, capitalist genius, Hyper — unding might disrupt the entire energy grid and mitigate human impact on climate change.225 One might consider Musk such a benevolent genius; a — ter all, he has announced a plan to colonize Mars and save humanity.226 But Hyper — unding also opens Pandora’s box: once this — inancing is unveiled, it can be used by anyone. History is replete with

https://www.evgo.com/why-evs/ (last visited Feb. 20, 2018) [https://perma.cc/ 7KDE-FELC]; Brian Merchant, Why We Need Electric Cars, TREEHUGGER (Aug. 3, 2010), http://www.treehugger.com/cars/why-we-need-electric-car-subsidies.html [https://perma.cc/FCH4-3ZDZ]; Steve Heckeroth, Why We Need Electric Cars, MOTHER EARTH NEWS (Nov. 2006), http://www.motherearthnews.com/green- transportation/electric-cars-zmaz06onzraw [https://perma.cc/9QJT-U57T].

1. Ecclesiastes 1:9.
2. Harrison Weber, Elon Musk: Tesla Model 3 Orders Hit $14 Billion in One Week, VENTUREBEAT (Apr. 7, 2016, 9:56 AM), https://venturebeat.com/2016/ 04/07/elon-musk-tesla-model-3-orders-surpass-14-billion-in-one-week/ [https://perma.cc/TR39-DU5S].
3. Evanthia Nanaki & Christopher Koroneos, Climate Change Mitigation and the Deployment o — Electric Vehicles in Urban Areas, 99 RENEWABLE ENERGY: INT’L J. 1153 (2016).
4. Nick Stockton, Elon Musk Announces His Plan to Colonize Mars and Save Humanity, WIRED (Sept. 27, 2016, 9:13 PM), https://www.wired.com/2016/09/elon- musk-colonize-mars/ [https://perma.cc/2A3X-Z2TU].

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examples o

inancial schemes gone awry.227 The task at hand, there — ore, is to see i — Hyper — unding — its into an existing paradigm in corporate — inance.

 A.    Securities

Taxonomy o ---  securities under the 1933 Securities Act and the 1934 Investment Act is an evolving process. For example, consider the textbook examples o ---  securities: debt and equity.228 These straight --- orward terms simply do not, and never did really, capture the wide range o ---

inancial activities that occur in the wild. As an initial matter, the commonplace notice o — a clear distinction between debt and equity is belied by the existence o — pre — erred stock.229 O — ten re — erred to as an equity that has debt-like characteristics,230 pre — erred stock is generally regulated under the law as equity but has — inancial characteristics o — debt, like regular payment on a — ixed schedule (dividends)231 and may lack voting rights typically associated with common stock.232 This once-novel security provides a valuable illustration — or how one might begin to understand and regulate the new — inancial technique o —

Hyper

unding.

       1. Pre --- erred Stock

Just like Hyper --- unding, pre --- erred stock was once an innovation in the world o ---

inance. Curiously, the earliest use o —

pre

erred stock, which is now a staple o — private corporate

inance, appears to have arisen — irst in a contentious public investment by the State o — Maryland in a private corporation.233 In 1834, the Baltimore and Ohio Railroad

1. See in

   ra Part III.A.1.

2. See Jared Hecht, Debt vs. Equity Financing: Which Way Should Your Business Go?, ENTREPRENEUR (July 19, 2016), https://www.entrepreneur.com /article/278430 [https://perma.cc/C3Z7-Q9SZ].

3. Lynn A. Stout, The Unimportance o

   Being E —

icient: An Economic Analysis o — Stock Market Pricing and Securities Regulation, 87 MICH. L. REV. 613, 640 (1988).

1. Id.
2. Id.
3. Id.

4. George Herberton Evans, Jr., The Early History o

   Pre — erred Stock in the United States, 19 AM. ECON. REV. 43, 43–44 (1929).

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(B&O) ran

rom Baltimore, Maryland, to Harper’s Ferry, West Virginia.234 The next year, B&O extended its line — rom Baltimore to Washington, D.C., and began lobbying the Maryland legislature — or — unds to complete an additional line to Pittsburgh, Pennsylvania.235 Meanwhile, the Chesapeake & Ohio Canal Company (C&O), which was then unpro — itable (perhaps due to its lack o — access to Pennsylvania’s rich coal

ields), also asked Maryland — or capital-improvement — unds.236 In this time o — great expansion o — America’s in — rastructure, other companies also desired — unds. The Maryland Assembly heard a bill on March 9, 1836, which would subscribe $8 million o — state — unds to the capital stocks o —

ive private railroad and canal companies.237 This is the equivalent o —

approximately $205 million today.238 The Maryland Assembly rejected the bill, but the

inanciers were undeterred.239 The Ways and Means Committee introduced a second bill, which called — or a stock subscription to B&O provided that the company guarantee a six percent annual dividend to the state.240 This bill also — ailed, although the concept prevailed: local newspapers reported that the bill “giving a pre — erence to the state in the Baltimore and Ohio Rail Company, was lost.”241 Through — urther negotiations, other “pre — erences” emerged. The State o — Maryland demanded the right to appoint one director — or every 5,000 shares o — stock it might hold, a provision designed to give Maryland control

1. John A. Lynch, Jr., Justice Douglas, The Chesapeake & Ohio Canal, and Maryland Legal History, 35 U. BALT. L.F. 104, 113 (2005).
2. Evans, supra note 233, at 43.
3. Id. at 44.

4. H.D.B. accompanying the Rep. o

   the Comm. o — Ways and Means, on the Subject o — the Finances and Internal Improvements (Md. 1835) (Md. Pub. Documents, Doc. k) (subscribing $3 million to Baltimore and Ohio Railroad Co., $3 dollars to Chesapeake and Ohio Canal Co., $1 million to Eastern Shore Railroad Co., $500,000 to Maryland Canal Co., and $500,000 to Annapolis and Potomac Canal Co.).

5. In

   lation Calculator, DAVEMANUEL.COM, http://www.davemanuel.com/ in — lation-calculator.php (last visited Feb. 20, 2018) [https://perma.cc/BU4X- ESHM] (computing that $8 million o — “1836 dollars would be worth: $205,128,205.13 in 2015”).

6. Ches. & Ohio Canal Co. v. Balt. & Ohio R.R. Co., 4 G. & J. 1, 41 (Md. 1832).
7. Evans, supra note 233, at 49.
8. Id. at 45 (citing BALTIMORE AMERICAN & COMMERCIAL DAILY ADVERTISER, June 2, 1836).

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1074 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

over one third o

the B&O board.242 Other B&O stockholders now opposed this “pre — erence” — or the State o — Maryland. The Corporation o — Georgetown, which held a signi — icant amount o — B&O stock, published an editorial which stated:

 It is to the unreasonable and anomalous character o ---  the
 loan that Georgetown objects. Upon what principle o ---  justice
 does Maryland claim to receive a certain stipulated
 dividend, or interest, i ---  you please, to the exclusion o ---  all
 other stockholders, and at the same time to have equal
 rights with those excluded stockholders in controlling by her
 vote, the interests and work o ---  the company?243

 Note that Georgetown classi --- ied this pre --- erred-stock issuance as a loan, not as an equity security.244 Georgetown described the dividend as “interest,” which is a characteristic o ---

debt.245 Moreover, the description o

this instrument as “anomalous” indicates its novelty.246 From this historical anecdote one may surmise not only that pre — erred stock was a novelty, but also that its character as an equity security was

ar — rom clear and had long been debated. Financial innovations are o — ten threatening to the status quo, which may use arguments o — justice and — airness to de — end its hereto — ore “pre — erred” position. The a — termath o — the B&O pre — erred-stock story is also instructive. Economic historian George Herberton Evans, Jr., reports:

 Between 1834 and 1850 there were so many success --- ul and
 unsuccess --- ul e ---

orts to sell pre — erred stock to individuals that it might almost be said that by the latter date this instrument had become in this country an established method — or raising railroad capital in emergencies. Newspaper advertisements and stock exchange quotations testi — y to the increasing popularity o — pre — erred stock in this

1. Id. at 49.
2. Id. at 48 (citing BALTIMORE AMERICAN & COMMERCIAL DAILY ADVERTISER, June 15, 1836).
3. Id. at 48.
4. Id.
5. Id.

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2018] HYPERFUNDING 1075

 early railroad construction period.247

In other words, once B&O provided the success o ---

undraising through pre — erred stock, most similarly situated companies — ollowed suit.248 Thus, as a novel — undraising device proves to be an e —

ective mode o — corporate — inance, it expands beyond its inception. The same should be expected o —

Hyper

unding.

       2. Investment Contracts

 While Hyper --- unding does not appear to be an “investment” as that term is commonly understood to mean “debt” or “equity,”249 but it might still be an “investment contract” as that term is de --- ined in the Securities Act o ---  1933.250 The statutory de --- inition o ---  a “security” is as obtuse as the implications o ---  being deemed a securities issuer are broad. Securities issuers are subject to registration, mandatory disclosure, and heightened anti --- raud liability.251 Others involved in securities transactions may also be subject to SEC registration, rules, supervision,252 and participants in securities transactions are exposed to civil and criminal liability.253 On the contrary, non-securities transactions receive much less regulatory attention.254
 A security is de --- ined by the 1933 Securities Act expressly to include stocks, bonds, debentures, and trans --- errable shares.255 These standard  --- inancial instruments are surely

1. Id. at 51.
2. This is particularly remarkable when, as was the case in the mid-1800s, the power to issue pre — erred stock generally required a legislative action by states. See, e.g., Amending the Charter o — the Housatonic Railroad Company, Passed 1850, in 4 RESOLVES AND PRIVATE LAWS OF THE STATE OF CONN. 1836-1857, at

3. This may indicate a

   urther lesson to be learned about the need — or corporate- state partnership in capital — ormation.

4. Investment, BLACK’S LAW DICTIONARY (9th ed. 2009). De

   ining an investment as: “[a]n expenditure to acquire property or assets to produce revenue; a capital outlay.”

5. The Securities Act o

   1933, 15 U.S.C. § 77b (2012).

6. Cynthia A. Williams, The Securities and Exchange Commission and Corporate Social Transparency, 112 HARV. L. REV. 1197, 1199–1207 (1999).
7. Id.
8. Id.
9. Id.
10. 15 U.S.C. § 77b(a)(1) (“‘[S]ecurity’ means any note, stock, treasury stock, security — uture, bond, debenture, evidence o — indebtedness, certi — icate o — interest

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1076 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

subject to securities regulation.256 However, the de

inition in the Securities Act includes several catchall generic terms, such as: investment contracts, evidence o — indebtedness, and certi — icates o — interest in pro — it-sharing agreements.257 It is not clear whether Hyper — unding involves the issues o — these or other catchall “securities.” The Supreme Court in SEC v. W.J. Howey Company set

orth a — our-part test to determine whether an investment contract exists.258 The Supreme Court de — ined an investment contract as any transaction in which “[1] a person invests his money, [2] in a common enterprise and [3] is led to expect pro — its [4] solely — rom the e —

orts [o — others].”259 Although the Howey test has set certain parameters on what exactly should be classi — ied as an “investment contract,” it remains challenging to determine what exactly a court may deem a security under this classi — ication.260 Because “most trans — ers o — consideration will satis — y [the

irst two prongs] o — the Howey test,” it is likely that Hyper — unding would as well.261 Here, prepurchasers paid $1,000 to Tesla, which is a trans — er o — consideration, and that would likely su —

ice — or a court to — ind the — irst prong is met.

or participation in any pro

it-sharing agreement, collateral-trust certi — icate, preorganization certi — icate or subscription, trans — erable share, investment contract, voting-trust certi — icate, certi — icate o — deposit — or a security, — ractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certi — icate o — deposit, or group or index o —

securities (including any interest therein or based on the value thereo

), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to — oreign currency, or, in general, any interest or instrument commonly known as a ‘security,’ or any certi — icate o — interest or participation in, temporary or interim certi — icate — or, receipt — or, guarantee o — , or warrant or right to subscribe to or purchase, any o — the — oregoing.”).

1. 15 U.S.C. § 77b.
2. Id.
3. SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
4. Id. at 298–99.

5. See Jeremy Epstein, 4 Reasons Why Tezos Could be the Netscape o

   the Blockchain, VENTUREBEAT (May 21, 2017, 10:25 AM), https://venturebeat.com /2017/05/21/4-reasons-why-tezos-could-be-the-netscape-o — -the-blockchain/ [https://perma.cc/E66M-VZLZ]. For example, ICOs are a new — orm o — investment not regulated by the SEC. Id. ICOs provide a way in which a new blockchain venture sells a digital currency they create to use with their so — tware be — ore the so — tware itsel — is written. Most ICOs raise money in Bitcoin or other cryptocurrencies. Id.

6. 2 CHECKLISTS FOR CORPORATE COUNSEL, § 12:9. CHECKLIST FOR DETERMINING WHAT IS A SECURITY (2017) [hereina — ter CHECKLIST FOR DETERMINING WHAT IS A SECURITY].

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2018] HYPERFUNDING 1077

There is a common enterprise, namely, the mass production o

the Model 3 and EV charging stations to support it, satisying the second prong o — the Howey Test.262 The last prong is also met because “the essential managerial or entrepreneurial e —

orts which a —

ect the — ailure or success o — the enterprise are per — ormed by the promoter.”263 Tesla, the promoter, is per — orming all the e —

orts which would bring about the mass production o — the Model 3, while the prepurchaser has contributed nothing but money. Moreover, the last prong would be met even i — the prepurchasers were — ound to be making some sort o — minor contribution because courts have generally not read “solely” as a strict or literal limitation.264 Applying Howey to Hyper — unding, there — ore, turns mainly on the issue o — whether prepurchasers expected pro — its. Expected pro — its is de — ined as “the expected return, whether

ixed or variable must be the principal motivation — or the investment.”265 Furthermore, “[t]he returns must come — rom earnings o — the enterprise or appreciation o — the investment based on anticipated earnings, but not merely — rom additional contributions.”266 While at — irst blush it may seem obvious that there are no expected pro — its in the Tesla Model 3 example, recall the purpose o — this Part is to discuss not only how Musk used this new — inancial species, but also to provide consideration o — how others may use it, and it would not be hard to imagine this

1. Howey Co., 328 U.S. at 298–99.
2. CHECKLIST FOR DETERMINING WHAT IS A SECURITY, supra note 261.
3. See, e.g., SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir. 1973), cert. denied, 414 U.S. 821 (1973) (“We hold, however, that in light o —

the remedial nature o

the legislation, the statutory policy o — a —

ording broad protection to the public, and the Supreme Court’s admonitions that the de — inition o — securities should be a — lexible one, the word ‘solely’ should not be read as a strict or literal limitation on the de — inition o — an investment contract, but rather must be construed realistically, so as to include within the de — inition those schemes which involve in substance, i — not — orm, securities.”); see also CHECKLIST FOR DETERMINING WHAT IS A SECURITY, supra note 261 (“The courts generally agree that a strict interpretation o — ‘solely’ would — rustrate the purpose o —

Howey.”); Peter S. Pearlman & Mark Lipton, What Is A Security?, N.J. LAW. MAG., May 1988, at 15, 17 (“Later courts read the ‘solely’ language out o — the Howey test in order to embrace within the de — inition o — investment contract those schemes in which the investor participated in the enterprise but whose e —

orts were not the critical e —

orts necessary — or its success.”).

1. ALAN R. PALMITER, SECURITIES REGULATION, EXAMPLES AND EXPLANATIONS 52 (6th ed. 2014).
2. Id.

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1078 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

instrument being used in connection with some sort o

pro — it interest. In — act, there is some evidence here that pro — it may have encouraged some to prepurchase the Model 3 itsel — .

 B.    Crowd --- unding

 Hyper --- unding is similar to “crowd --- unding,” which is raising a large amount o ---  money  --- rom a large number o ---  people via the internet,267 but it has at least one vital distinction. Crowd --- unding raises money through intermediaries called “portals” such as Kickstarter, GoFundMe, IndieGogo, Crowd --- unding, and others.268 These portal-intermediaries

unction as sel — -regulating entities that impose regulations on themselves in order to protect consumers and investors.269 Intermediaries make a small amount o — money — rom each transaction that occurs on their portals, so they are motivated to sel — -regulate because their business model is to develop the trust and con — idence o — users in the long run.270 Hyper — unding, on the other hand, is a direct — undraising campaign, where the company sells directly to the general public with no intermediaries. This is a one-time game, so — undraisers lack the incentive to build up trust over time. Musk surely leveraged his charismatic personality to bring customers directly to the Model 3 presale. Indeed, this celebrity271 CEO personally selected the guest list to attend the Model 3 unveiling.272 In a per — ormance reminiscent o — the late Steve Jobs, Musk whipped the crowd into a veritable — renzy as

1. Seth C. Oranburg, A Place o

   Their Own: Crowds in the New Market — or Equity Crowd — unding, 100 MINN. L. REV. HEADNOTES 147, 148 (2016).

2. Brad

   ord, supra note 38, at 5.

3. Yancey Strickler, Perry Chen, & Charles Adler, Kickstarter Is Not A Store, KICKSTARTER: BLOG (Sept. 20, 2016), https://www.kickstarter.com/blog/ kickstarter-is-not-a-store [https://perma.cc/8LAW-LDLR]; see also David Murphy, New PayPal Crowd — unding Plan Aims to Avoid Frozen Funds, PC MAG. (Mar. 14, 2014, 4:15 PM), http://www.pcmag.com/article2/0,2817,2455006,00.asp [https:// perma.cc/G95B-SP7D].

4. Brad

   ord, supra note 38, at 5.

5. Musk is not only a well-known personality, but he also has been

   eatured in TV and movies such as the National Geographic documentary MARS and was invited to the premiere o — HBO’s hit TV series Silicon Valley.

6. Fred Lambert, Tesla Model 3 Unveiling Event Reportedly Will Have Only a Small Guest List Selected by Elon Musk, ELECTREK (Mar. 8, 2016, 5:25 AM), https://electrek.co/2016/03/08/tesla-model-3-event-guest-list-elon-musk/ [https://perma.cc/N839-3TTT].

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2018] HYPERFUNDING 1079

he teased the $35,000 EV.273 Leveraging this immense star power to per — orm a direct-to-consumer — inancing is remarkably di —

erent — rom the “traditional” method o — crowd — unding via a plat — orm. The plat — orm is the hallmark o — crowd — unding. A new economy is rising on digital plat — orms such as Amazon, Etsy, Facebook, Google, Sales — orce, and Uber.274 The centrality and essentiality o — the plat — orm in crowd — unding is widely accepted in the economic literature as well.275 There are — our problems in crowd — unding—coordination, gatekeeping, inexperience, and patronage—which crowd — unding plat — orms solve.276 For example, a coordination problem arises where no one wants to

und a project that will not receive enough — unds — rom others to succeed, so it is very di —

icult to raise the — irst dollar.277 Tilt, “the social payments app o — the — uture,”278 solves the coordination problem by allowing entrepreneurs to raise money

rom a large number o — people over a secure — inancial network while mandating that the money must be returned at no cost i —

the

undraising goal is not met.279 Remarkably, Tesla managed to solve all — our o — these crowd — unding challenges without the use o — a plat — orm. This is not possible — or smaller entrepreneurs. Tesla was able to — orgo traditional crowd — unding and instead use Hyper — unding

1. Tesla Unveils Model 3, YOUTUBE (Mar. 31, 2016), https://www.youtube. com/watch?v=Q4VGQPk2Dl8 [https://perma.cc/8T2A-N4WF].
2. Michael Cusumano, How Traditional Firms Must Compete in the Sharing Economy, COMMUNICATIONS OF THE ACM, Jan. 2015, at 32 (arguing that new sharing economy web plat — orms increasingly threaten traditional business models).

3. See, e.g., Moriah Meyskens & Lacy Bird, Crowd

   unding and Value Creation, 5(2) ENTREPRENEURSHIP RES. J. 155, 156 (“Crowd — unding — acilitates the

inancing process by providing a plat — orm that enables individuals passionate about an idea or cause to easily invest small amounts o — capital and to share the idea with others.”) (citing Paul Belle — lamme et al., Crowd — unding: An Industrial Organization Perspective (June 10, 2010) (unpublished manuscript) (prepared — or Digital Business Models: Understanding Strategies workshop); Ethan Mollick, The Dynamics o — Crowd — unding: An Exploratory Study, 29 J. BUS. VENTURING 1, 1–16 (2014); Todd W. Moss et al., The E —

ect o — Virtuous and Entrepreneurial Orientations on Micro — inance Lending and Repayment: A Signaling Theory Perspective, 39 ENTREPRENEURSHIP THEORY & PRACTICE 1, 27–52 (2015)).

1. Peter Younkin & Keyvan Kashkooli, What Problems Does Crowd

   unding Solve?, 50 CAL. MGMT. REV. 20, 22 (2016).

2. Id. at 24, 26.
3. TILT, https://www.tilt.com/ (last visited Feb. 20, 2018), [https://perma.cc/XJE3-BSAE].
4. Meyskens & Bird, supra note 275, at 161.

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1080 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

because the corporation has the star power o

its CEO Elon Musk. Tesla has — inancial and technological in — rastructure to host a major publicity event, develop a web site that allows — or sa — e trans — er o —

unds, and compliance with public-company security regulation and corporate-governance sa — eguards. There — ore, since Tesla did not use a plat — orm to raise money via the internet, it did not per — orm traditional crowd — unding. Rather, Tesla leveraged its unique assets to raise money directly — rom the public in a manner not subject to the constraints and challenges o — crowd — unding. First, despite provisions in the Model 3 Deposit to the contrary,280 people have apparently been trading and re-selling their priority positions to purchase the new EV.281 Second, early purchasers will pay less — or the Model 3 than later ones, thanks to the — ederal EV tax credit phase-out:282 only the — irst two hundred thousand Tesla EVs quali — y — or a $7,500 tax credit under Internal Revenue Code Section 30D.283 In addition, many states also o —

er incentives to purchasers o —

EVs, some o

which also phase out.284 Tesla actively promotes these incentives on its website, although it makes no mention there o — the — ederal phase-out.285 This would not be the strangest case where the courts

ound that a “creative” presale agreement was in — act a

1. Model 3 Reservation Terms & Conditions, supra note 82.

2. Sick

   ox, Comment to Will You Sell Your New Model 3 — or a Pro — it?, TESLAFORUM (May 23, 2016), https://teslamotorsclub.com/tmc/threads/will-you- sell-your-new-model-3- — or-a-pro — it.70670/ [https://perma.cc/QZ2Q-GWRT].

3. Plug-in Electric Vehicle Credit at a Glance, IRS (Jan. 25, 2017), https://www.irs.gov/credits-deductions/individuals/plug-in-electric-drive-vehicle- credit-section-30d [https://perma.cc/J87A-Y89Q].
4. 26 U.S.C. § 30D, 26 I.R.C. § 30D (2012). The credit under section 30D applies to certain “low-power” electric vehicles. Under section 30D a taxpayer is allowed a one-time credit against income tax with respect to each new quali — ied EV placed in service during the taxable year. Id.

5. Kristy Hartman, State E

orts Promote Hybrid and Electric Vehicles, NAT’L CONF. OF ST. LEG. (Dec. 3, 2015), http://www.ncsl.org/research/energy/state- electric-vehicle-incentives-state-chart.aspx [https://perma.cc/XY8N-T9E7].

1. Support, TESLA, https://www.tesla.com/support/incentives (last visited Feb. 11, 2018) [https://perma.cc/GQ9K-2NER] (stating that “[a] $7,500 — ederal income tax credit is available to all customers” without mentioning that this tax credit is only available — or each automaker until such automaker sells 200,000 EVs). As o — May 30, 2018, Tesla sold 179,029 EVs, so the $7,500 — ederal tax credit will only be available — or the next 21,000 Tesla EV purchasers. See Federal EV Tax Credit Phase Out Tracker by Automaker, EV ADOPTION, http://evadoption.com/ev-sales/ — ederal-ev-tax-credit-phase-out-tracker-by- automaker/ (last visited May 30, 2018) [https://perma.cc/Q6BJ-Z5UK].

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security. In Howey itsel

, the de — endant was a large land owner in Lake County, Florida. The de — endant o —

ered prospective customers a deal styled as two separate agreements: a land sales contract, pursuant to which customers purchased a small plot o — land — rom W. J. Howey Company, and a service contract, pursuant to which Howey-in-the-Hills Service, Inc. planted and maintained citrus trees.286 The purchasers were mainly non- residents o — Florida who knew little about cultivating citrus trees, and the individual tracts were not — enced o —

or well- marked.287 Meanwhile, the service contract gave Howey-in-the- Hills a ten-year leasehold over the land, and the purchasers (who had no right to enter the land and take or market their own — ruit) expected to receive a share o — the proceeds — rom what the service company sells.288 On these — acts, the Howey Court held that this purported land sale and service agreement was actually an investment contract.289 While the Tesla Model 3 presale is not particularly analogous to the — acts o — Howey, Hyper — unding could clearly be used to promote a similar scheme.290 Additionally, as the next Section will discuss, the presale o — land has itsel — become the subject o — consumer-protection regulations.

1. SEC v. W.J. Howey Co., 328 U.S. 293, 295–96 (1946).
2. Id. at 296–97.
3. Id.

4. Id. at 300. (“Thus all the elements o

   a pro — it-seeking business venture are present here. The investors provide the capital and share in the earnings and pro — its; the promoters manage, control and operate the enterprise. It — ollows that the arrangements whereby the investors’ interests are made mani — est involve investment contracts, regardless o — the legal terminology in which such contracts are clothed. The investment contracts in this instance take the — orm o — land sales contracts, warranty deeds and service contracts which respondents o —

er to prospective investors. And respondents’ — ailure to abide by the statutory and administrative rules in making such o —

erings, even though the — ailure result — rom a bona — ide mistake as to the law, cannot be sanctioned under the Act.”).

1. See Smith v. Gross, 604 F.2d 639, 641 (9th Cir. 1979) (holding that an advertisement to solicit buyers to raise earthworms constituted a security and the material misrepresentations about the growth and market value o — earthworms constitutes a violation o —

ederal securities — raud laws); Miller v. Cent. Chinchilla Grp., Inc., 494 F.2d 414 (8th Cir. 1974) ( — inding that de — endant’s sale o —

chinchillas was in

urtherance o — a common enterprise to raise chinchillas and holding that de — endant violated registration and anti — raud provisions in the Securities Act o — 1933, Rule 10b o — the Securities Exchange Act o — 1934, Rule 10b- 5, and common — raud law); SEC. v. Koscot Interplanetary, Inc., 497 F.2d 473, 479 (5th Cir. 1974) (holding that multi-level pyramid scheme constitutes an unregistered issuance o — securities where participants purchased cosmetics upon “the expectation o — galactic pro — its”).

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 C.    Presales

 Presales are when goods are sold be --- ore they are  --- ully designed or manu --- actured.291 They are relatively common in the high-end automotive industry,292 so this seems to be a reasonable  --- irst approximation  --- or a Hyper --- unding analogy. The Model 3 presale, however, is readily distinguishable  --- rom traditional automotive presales  --- or at least two reasons. First, traditional automotive presales are very exclusive and limited to the rich and  --- amous, whereas the Model 3 presale was open to the general public and designed  --- or the “everyman.”293 Second, traditional automotive presales  --- und the one-o ---

development o

rare and customized supercars.294 The Model 3 presale — unds the development not only o — an “everyman’s” car but also to build a massive car production — acility that also will produce other vehicles, a battery — actory that will be used — or both automotive and home use, and a network o — EV charging stations.295 Exotic automakers like Ferrari and Lamborghini primarily sell their most exclusive cars only to select brand-loyal customers, who o — ten make deposits years be — ore receiving the car.296 You cannot merely walk into a Ferrari dealership and purchase the LaFerrari supercar.297 In — act, Ferrari puts limitations and expectations on buyers that must be — ul — illed be — ore they are even allowed to write a check.298 Several high- pro — ile buyers have been turned down in their request to buy this $1.3 million machine.299

1. David Burkus, Sell Your Product Be

   ore It Exists, HARVARD BUS. REV. (Dec. 25, 2013), https://hbr.org/2013/12/sell-your-product-be — ore-it-exists [https:// perma.cc/7S85-3S5P].

2. Jordon Golson, How to Earn the Right to Buy Ferrari’s Most Exclusive Hypercar, WIRED (Oct. 24, 2014, 2:03 PM), https://www.wired.com/2014/10/ herjavec- — errari-la — errari/ [https://perma.cc/D8LS-HBQZ].
3. Andrew P. Collins, What It’s Actually Like To Ride In The Tesla Model 3, JALOPNIK (Apr. 1, 2016, 2:23 PM), http://jalopnik.com/what-its-actually-like-to- ride-in-the-tesla-model-3-1768405248 [https://perma.cc/9HDX-S4WH].
4. Golson, supra note 292.

5. See, e.g., Chris Ziegler, Elon Musk Bought $100 Million More Worth o

Tesla this Week, VERGE (Jan. 29, 2016, 6:15 PM), http://www.theverge.com/2016/1 /29/10873576/elon-musk-100-million-option-exercise-stock-tesla [https://perma.cc/735G-NJ2P].

1. Golson, supra note 292.
2. Id.
3. Id.
4. Alex Davies, It Takes a Lot More Than Money to Buy the Latest Ferrari

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 While it may not seem patently alarming that some millionaires are denied the right to buy supercars, at least one o ---  these “victims” o ---  the limited exotic automobile presale modality is seeking damages.300 Preston Henn, an 85-year-old Florida resident and sel --- -de --- ined “Ferrarista,”301 is suing Ferrari North America Inc.  --- or de --- amation and seeking $75,000 in damages to his reputation when Ferrari returned his $1,000,000 deposit check  --- or a LaFerrari.302
 The Tesla Model 3 presale may have the opposite problem. Far  --- rom being exclusive, Tesla will pre-sell a Model 3 to anyone who makes a $1,000 deposit.303 While one might, at

irst blush, be tempted to applaud Tesla — or being — ar more egalitarian than Ferrari, some alternative concerns may arise when companies sell expensive items people cannot a —

ord. For example, some economists claim that the mortgage crisis was instigated by the large number o — homes that were sold to people who obviously could not a —

ord them.304 Likewise, Tesla, who also operates as a lender in — inancing and leasing cars to its customers, has legal obligations to ensure its — inancees and lessees can a —

ord the car.305 Tesla seems aware o — this, as indicated by their web page titled Tesla Leasing, which includes a paragraph titled “Which Model S — its in my monthly budget?” and a — inancial calculator.306 The Tesla Model 3 presale page o —

ers no discussion about budget or a —

ordability whatsoever.307 From a contract analysis standpoint, the deposit agreement is not a typical deposit agreement. As discussed

Supercar, BUS. INSIDER (June 7, 2013, 9:24 AM), http://www.businessinsider. com/how-to-buy-a- — errari-la — errari-2013-6/ [http://perma.cc/U428-GCPM].

1. Complaint, Henn v. Ferrari North America, Inc., (No. 0:16-cv-61830) (S.D. Fla. Aug. 1, 2016), 2016 WL 4087776.
2. A Ferrarista is a Ferrari owner. See THEFERRARISTA.COM, https://www.the — errarista.com/ (last visited Apr. 12, 2018) https://perma.cc/2VVT- YSMC.
3. Complaint, supra note 300.
4. Model 3 Reservation Terms & Conditions, supra note 82.
5. See, e.g., Why Did Banks Give Home Loans to People Who They Knew Couldn’t Pay?, WASHINGTON’S BLOG (Oct. 27, 2010), http://www.washingtonsblog.com/2010/10/why-did-banks-give-home-loans-to- people-who-they-knew-couldnt-pay.html [https://perma.cc/2WM7-QZM3].
6. Tesla Lending, TESLA, https:/www.tesla.com/support/tesla-lending (last visited Feb. 21, 2018) [https://perma.cc/T88G-FZ4J].
7. Tesla Leasing, TESLA, https://www.tesla.com/support/tesla-leasing (last visited Feb. 21, 2018) [https://perma.cc/7XPX-KGCY].
8. Model 3 Reservation Terms & Conditions, supra note 82.

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above, the so-called “Reservation Agreement” is distinguishable

rom a traditional deposit agreement — or at least nine reasons.308 While Tesla has no legal obligation to ensure that those who reserve a Model 3 can a —

ord to buy it, the vast di —

erence between the — inancial means o — an “everyman” Model 3 prepurchaser and the “rich and — amous” prepurchasers o — the supercars that typi — y the automotive presale counsels that Hyper — unding should not be thought o — or regulated as a traditional automotive presale.

       1. Interstate Land Sales

 While Hyper --- unding appears to be a completely new phenomenon, enabled by the power o ---  the internet, this is not the  --- irst time a new technology and the right market conditions have given rise to new marketplaces and new modalities o ---

undraising. A — ter World War II, the US government provided many veterans with money to build houses in the suburbs.309 As automobile ownership became more widespread, housing developments spread — ar beyond urban centers.310 As demand

or — ar- — lung virgin land increased, so did deceptive and

raudulent sales.311 Unscrupulous land sellers used new technology, long distance home phone service (the internet o —

its day), to target many veterans and senior citizens.312 In 1968, Congress responded by passing the Interstate Land Sale Act (ILSA) to curb the increasing use o —

raudulent schemes to sell large tracts o — undevelopable land to unsuspecting consumers.313 ILSA is germane to analyzing Hyper — unding because both

1. See supra Section I.D.
2. G.I. Bill, HISTORY.COM, http://www.history.com/topics/world-war-ii/gi-bill# (last visited Feb. 22, 2018) [https://perma.cc/9V3E-KGKG] (“The government guaranteed loans — or veterans who borrowed money to purchase a home, business or — arm. These loans enabled hordes o — people to abandon city li — e and move to mass-produced, ‘cookie cutter’ homes in suburbia.”).
3. Robert Bruegmann, The Housing Bubble and The Boomer Generation, NEWGEOGRAPHY (Dec. 3, 2008), http://www.newgeography.com/content/00452-the- housing-bubble-and-boomer-generation [https://perma.cc/F4SQ-VANT].
4. Joseph Einav, Read Between the Lines: Why Recent ILSA Litigation Is Bad — or Business and Contravenes Congressional Intent, 33 CARDOZO L. REV. 2139, 2147 (2012).
5. Id.
6. 15 U.S.C. §§ 1701–1720 (2012).

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undeveloped-land sales and undeveloped-car sales are similar products o — di —

erent eras’ zeitgeist and verve. ILSA is also instructive because it is based on perhaps the most — ar- reaching consumer and investor protection regulation: the Securities Act o — 1933.314 The Securities Act relies heavily on disclosure requirements because contemporary thinkers like Justice Louis Brandeis convinced the legislature that “[s]unlight is said to be the best o — disin — ectants; electric light the most e —

icient policeman.”315 ILSA likewise requires undeveloped-land sellers to — urnish potential buyers with accurate in — ormation about the property.316 One might likewise consider imposing a disclosure regime on Hyper — unding. But such disclosure regimes are — ar — rom per — ect. In — act, legal scholars have convincingly argued that investors’ protections like security-disclosure requirements have massive costs that harm investors more than they help.317 Pro — essor Richard A. Epstein identi — ies — our regulatory pit — alls that should be avoided generally.318 These apply to Hyper — unding:

irst, the value o — regulation depreciates over time, as static regulations calci — y the dynamic skeleton o — innovation; second, regulations add cost, which depresses demand and can potentially regulate a good out o — existence; third, once regulation is enacted, it tends to metastasize; and — ourth, regulators are prone to capture by the — ew entities who greatly bene — it — rom the regulation at the expense o — the many who are slightly harmed by it.319 As a case in point, ILSA itsel — may have outlived its use — ulness. For example, Joseph Einav points out that litigants have begun abusing ILSA to rescind non-

raudulent land sales.320 This is precisely the sort o — capture and harm against which Pro — essor Epstein warns.321 Similar to the land sales that were subject to high levels o —

consumer risk and prompted the enactment o

ILSA, and perhaps even more akin to the securities — rauds that promoted

1. 15 U.S.C. § 77a (2012).
2. LOUIS D. BRANDEIS, OTHER PEOPLE’S MONEY AND HOW THE BANKERS USE IT 92 (1914).
3. Einav, supra note 311, at 2147.

4. See, e.g., Richard A. Epstein, The Dangers o

   “Investor Protection” in Securities Markets, 12 TEX. REV. L. & POL. 411, 413 (2008).

5. Id.
6. Id. at 414–17.
7. See Einav, supra note 311, at 2158.
8. See, e.g., Epstein, supra note 317, at 413.

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the 1933 Securities Act, Hyper

unding raises new questions about promoting consumer interests in our digital era. It is important to recognize at this nascent stage that heavy-handed regulations o — ten derail emerging companies and stymie development o — innovation technologies and techniques, while at the same time recognizing that a — ailure to implement sensible consumer protections can lead to a public backlash and exactly the sort o — knee-jerk legislation that also crushes entire nascent industries.322

       2. Ponzi Schemes

 Sometimes it appears that the di ---

erence between brilliance and — raud is whether, in retrospect, the scheme was success — ul. While one may trust Elon Musk to — ollow through on his Hyper — unding promises, it would be imprudent to ignore how this sort o — corporate — inance technique could be used to propagate outright — raud such as Ponzi schemes. “Ponzi scheme” is de — ined by Black’s Law Dictionary as “[a]

raudulent investment scheme in which money contributed by later investors generates arti — icially high dividends or returns

or the original investors, whose example attracts even larger investments.”323 This dictionary de — inition somewhat sterilizes what is otherwise a term o — art used to describe a wide variety o —

raud.324 Since 2008, any discussion o — Ponzi schemes instantly brings Bernie Mado —

and his elaborate — inancial hoax to mind.325 However, it was an Italian immigrant, Charles Ponzi, whose early 1900s — raud led to the in — amous name “Ponzi scheme.”326 At — irst glance, Charles Ponzi and Bernie Mado —

could not be more di —

erent, although they came to a similar end. Unlike Mado —

’s long-lasting — raud, Ponzi’s scheme was very brie — ,

1. See Lucas E. Buckley et al., The Intersection o

   Innovation and the Law, WYO. LAW., Aug. 2015, at 36, 38–39 (2015) (observing how with the advent o — an “on-demand economy,” companies such as Uber and Ly — t — ace new problematic regulations and widespread opposition).

2. Ponzi scheme, BLACK’S LAW DICTIONARY (10th ed. 2014).

3. Mark A. McDermott, Ponzi Schemes and the Law o

   Fraudulent and Pre — erential Trans — ers, 72 AM. BANKR. L.J. 157, 158 (1998).

4. David A. Gradwohl & Karin Corbett, Equity Receiverships

   or Ponzi Schemes, 34 SETON HALL LEGIS. J. 181, 183 (2010).

5. Id. at 183–84.

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lasting only

rom December 1919 until August 1920.327 Ponzi devised a system o — buying postal reply coupons in European currencies at — ixed, outdated rates o — exchange and redeeming them in the United States — or American currency, thus generating a guaranteed pro — it.328 Families and individuals alike entrusted Ponzi with their cash hoping to maximize their savings.329 Un — ortunately, as the story goes, Ponzi’s scheme turned out to be less pro — itable than he had hoped, generating only enough returns to pay those redeeming their coupons.330 Ponzi duped tens o — thousands o — people out o — millions o —

dollars in a short-lived craze that became the de

ining con — idence scheme o — its time.331 Ponzi was ultimately convicted o — mail — raud.332 Mitchell Zucko —

, Mr. Ponzi’s biographer, claims “[Ponzi] did it with such verve and charisma, and it attracted so much attention” in a time when the newspapers were eager to break a story o — this magnitude.333 Zucko —

commended Ponzi’s ability to tap into the desires o — the masses and captivate average citizens to trust him with their money.334 Charles Ponzi maintained until he passed away that he was acting in good

aith.335 Zucko —

describes the rise and — all o — his scheme by stating: “The underpinning o — his scheme was a theoretically possible — orm o — arbitrage. He was sure that i — he just had enough money to carry it out it would be O.K.—and on paper it would have, but it would logistically have been impossible.”336 Ponzi transactions are simple in their execution: the

raudsters retain the investors’ capital in exchange — or empty promises o — high returns.337 The would-be — raudster may even believe his own promises o — high returns to be genuine and true

1. Id. at 188.
2. Id. at 188–89.
3. MITCHELL ZUCKOFF, PONZI’S SCHEME: THE TRUE STORY OF A FINANCIAL LEGEND 5–17 (2006).
4. Id.
5. Id.
6. How a Master Scammer Met His Match: Ponzi vs. the Postal Inspection Service, U.S. POSTAL INSPECTION SERV., https://postalinspectors.uspis.gov/ radDocs/consumer/Ponzi_vs_USPIS.html (last visited March 13, 2018) [https://perma.cc/Q2S9-FFLV].
7. ZUCKOFF, supra note 329, at 236–48, 293–314.
8. Id.
9. Id.
10. Id.
11. Id.

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at the outset, but eventually the scheme

ails, and history is the judge. I — Elon Musk — ails to deliver on the Model 3, was the

unding o — the Model 3 a giant Ponzi scheme — or purposes o —

unding the Model S and Model X? I — Elon Musk is success — ul, does he open the door — or others to implement a similar strategy to raise money — rom consumers who are not adequately protected?

       3. Bankruptcy Protections

 Fortunately, the United States Bankruptcy Code provides some consumer protections that may apply to Hyper --- unding, although these protections are limited in ability to compensate victims o ---  mistaken or  --- raudulent Hyper --- unding schemes. Although Tesla’s presale contract does not speci --- y any priority position  --- or repayment o ---  depositors in bankruptcy—and collective action and rational apathy problems would make it virtually impossible  --- or such a diverse group o ---  people to negotiate  --- or such rights— --- ederal law does provide a backstop.
 In bankruptcy, expenses and claims generally have the

ollowing priority338: (1) unsecured claims — or domestic support obligations,339 (2) Federal Reserve bank loans,340 (3) claims arising in the ordinary course o — business a — ter bankruptcy was declared but be — ore a trustee is appointed,341 (4) wages, salaries, and sales claims up to $12,850 per person,342 (5) contributions to employee bene — it plans up to $12,850 per employee,343 (6) unsecured claims by producers o — grain or — ish up to $6,325 per person,344 (7) unsecured claims — or consumer deposits that were not delivered up to $2,850 per person,345 (8) unsecured claims o — governmental units,346 (9) unsecured claims based on the commitment o — an FDIC-insured lender,347

1. 11 U.S.C. §§ 507 et seq. (2012).
2. 11 U.S.C. § 101 (14A) (2012) (“The term ‘domestic support obligation’ means a debt that accrues be — ore, on, or a — ter the date o — the order — or relie — in a case under this title, including interest that accrues on that debt as provided.”).
3. 12 U.S.C. § 343 (2012).

4. 11 U.S.C. § 502(

   ) (2012).

5. As adjusted per 11 U.S.C. § 104.
6. As adjusted per 11 U.S.C. § 104.
7. As adjusted per 11 U.S.C. § 104.
8. As adjusted per 11 U.S.C. § 104.

9. Unsecured claims o

   governmental units in bankruptcy are subject to many caveats. See 11 U.S.C. § 507(a)(8).

10. The Federal Depository Insurance Corporation (FDIC) provides deposit

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and (10) claims

or personal injury and wrong — ul death resulting — rom the debtor’s unlaw — ul, intoxicated use o — a motor vehicle or vessel. In other words, people who gave a $1,000 deposit to Tesla have a statutory right to be seventh in priority — or bankruptcy claims. But holding the seventh unsecured position (which is subordinate to — ishmongers) does not guarantee repayment. Additionally, this right only covers deposits up to $2,850, and

uture Hyper — unding could solicit — unds in excess o — the covered amount. Indeed, there have been at least — ourteen crowd — unding campaigns to date whose maximum pledge exceeded the covered amount,348 and Hyper — unding has proven capable o — raising — ar more money more quickly than crowd — unding. There — ore, the bankruptcy protections — or Hyper — unding depositors may be illusory in many cases.

       4. Fair Credit Billing Act Protections

The Fair Credit Billing Act (FCBA)349 imposes requirements on credit and charge card accounts to ensure that creditors handle accounts  --- airly and promptly.350 When consumers who use a credit card are billed  --- or merchandise they never receive, they may be able to receive their money back, up to $5,000,  --- rom the credit provider pursuant to the FCBA.351 However, the statute does not have an express provision  --- or the return o ---

unds — or goods and services never received. Rather, these transactions are captured under § 1666,

insurance to US banks.

1. According to Shopi

   y Inc., these crowd — unding companies received single pledges in excess o — $2,850: 3Doodler ($10,000), ARKYD ($10,000), Canary ($8,800), Emotiv Insight ($5,000), GravityLight ($5,000), Kano ($10,000), Kreyos ($11,000), Mis — it Shine ($14,999), Pebble ($10,000), Pono Music ($5,000), Robot Dragon — ly ($2,899), Scandu Scout ($16,000), SCiO ($10,000), and The Dash ($2,999). The Ultimate Guide to Crowd — unding: Optimizing Rewards and Perks, SHOPIFY, https://www.shopi — y.com/guides/crowd — unding/optimizing-crowd — unding- rewards-perks (last visited Feb. 9, 2018) [http://perma.cc/PN92-VVQR].

2. 15 U.S.C. §§ 1666-1666j (2012).

3. Oren Bar-Gill & Elizabeth Warren, Making Credit Sa

   er, 157 U. PA. L. REV. 1, 87 n.284 (2008).

4. Consumer In

   ormation: Disputing Credit Charges, FED. TRADE COMM’N, https://www.consumer. — tc.gov/articles/0219-disputing-credit-card-charges (last visited Feb. 21, 2018) [http://perma.cc/D8UT-M277] (“You also can sue a creditor who violates the FCBA. I — you win, you may be awarded damages, plus twice the amount o — any — inance charge—as long as it’s between $500 and $5,000, or higher amounts i — a pattern or practice o — violations is established.”).

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1090 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 89

Correction o

Billing Errors, which requires the consumer to noti — y the creditor within sixty days o — receiving the credit statement on which this charge appears.352 Hyper — unding (and most crowd — unding campaigns) may not promise delivery within sixty days. Indeed, Elon Musk said it would be at least one year — rom deposit to delivery.353 By the time that a consumer can theoretically know that the product will not be delivered on time, i — at all, the window — or — iling a complaint has already closed. There — ore, the FCBA does not seem to provide any real protections — or victims o —

Hyper

unding (or crowd — unding) — raud or — ailure. Rather, the long time between deposit and receipt means that the governing law — or such transactions is caveat emptor.

 D.    Initial Coin O ---

erings

An ICO is a crowd --- unding centering around cryptocurrency.354 The term “ICO” entered the vernacular around 2014, when Ethereum raised about $2.3 million in just over twelve hours.355 Ethereum called this a “presale,” but what was it really selling? Ethereum’s  --- ounder, Vitalik Buterin, explained that it was selling “Ether,” which is “simply a token use --- ul  --- or paying transaction  --- ees or building or purchasing decentralized application services on the Ethereum

1. 15 U.S.C. § 1666(a), (b)(3).

2. Jordan Golson, Tesla Model 3 Announced: Release Set

   or 2017, Price Starts at $35,000, VERGE (Mar. 31, 2016, 11:58 PM), https://www.theverge.com/ 2016/3/31/11335272/tesla-model-3-announced-price-release-date-specs-preorder [https://perma.cc/QW57-H9EJ] (“Musk is ‘ — airly con — ident’ that deliveries will begin by the end o — 2017.”).

3. Usman W. Chohan, Initial Coin O

erings (ICOs): Risks, Regulation, and Accountability (Nov. 30, 2017) (unpublished manuscruipt, Univ. New S. Wales), https://papers.ssrn.com/sol3/papers.c — m?abstract_id=3080098 [http://perma.cc/89FX-MX7M].

1. Armand Tanzarian, Ethereum Raises 3,700 BTC in First 12 Hours o

Ether Presale, COINTELEGRAPH (July 23, 2014), https://cointelegraph.com/news/ ethereum-raises-3700-btc-in- — irst-12-hours-o — -ether-presale [http://perma.cc/6NCR-8N8H]. Ethereum sold 7.4 million “Ether” (ETH) tokens — or 3,700 “Bitcoins” (BTC) tokens. Victoria van Eyk, Ethereum Launches Own ‘Ether’ Coin, With Millions Already Sold, COINDESK (July 23, 2014, 12:30 PM), https://www.coindesk.com/ethereum-launches-ether-coin-millions-already-sold/ [https://perma.cc/W7LL-D7EJ] (“7 million ether (ETH) sold a — ter approximately 12 hours.”). At the time, one BTC was trading — or about $620. Historical Data — or Bitcoin, COINMARKETCAP.COM, https://coinmarketcap.com/currencies/bitcoin/ historical-data/?start=20140722&end=20140724 (last visited Mar. 26, 2018) [https://perma.cc/E4C7-3Y3H].

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plat

orm.”356 Buterin was care — ul to proclaim that “Ether is a product, NOT a security or investment o —

ering.”357 Fast-

orward to three years later: you can now invest your retirement — unds in Ether.358 With the bene — it o — hindsight, we can clearly see that Buterin was selling an investment opportunity in 2014. Indeed, ICOs are widely regarded as some o — the hottest investment opportunities today.359 Even some o —

icials at the NASDAQ stock exchange have expressed interest in ICOs.360 ICO proceeds grew — orty times — rom 2016 to 2017,361 and more than 180 new ICOs are scheduled to launch in 2018.362 Yet most investors do not understand ICOs and their risks.363 First, almost all ICOs use Bitcoin as a reserve currency.364 This means that all the risks associated with

1. Vitalik Buterin, Announcement: Launching the Ether Sale, ETHERIUM BLOG (July 22, 2014), https://blog.ethereum.org/2014/07/22/launching-the-ether- sale/ [http://perma.cc/9DZA-529V].
2. Id.
3. Alexander Lielacher, You Can Now Put Ethereum’s Ether in Your Retirement Fund, BTCMANAGER.COM (Apr. 19, 2017), https://btcmanager.com/you- can-now-put-ethereums-ether-in-your-retirement- — und/ [http://perma.cc/B4LL- 49YE] (discussing how BitcoinIRA.com created a new investment product that allows individuals with a sel — -directed investment retirement account to hold Ether as an investment).
4. See, e.g., Laura Shin, How to Speculate in ICOs and Buy Tokens: An Easy Step-By-Step Guide, FORBES (July 18, 2017, 8:00 AM), https://www. — orbes.com/ sites/laurashin/2017/07/18/how-to-speculate-in-icos-and-buy-tokens-an-easy-step- by-step-guide/#1 — 232a05743a [https://perma.cc/N6AZ-LF2U]; Bernard Moon, Don’t Be Dumb: How to Invest Money in ICOs and Blockchain Startups, FORBES (Dec. 5, 2017, 1:27 AM), https://www. — orbes.com/sites/sparklabs/2017/12/05/dont-be-dumb- money-how-to-invest-in-icos-and-blockchain-startups/#76c9a5897c74 [https://perma.cc/883R-6FS3].
5. Alex Lielacher, Should You Invest in ICOs?, NASDAQ: BLOG (Sept. 7, 2017, 2:26 PM), https://www.nasdaq.com/article/should-you-invest-in-icos- cm842513 [https://perma.cc/39X4-UVYH].
6. Sergi Dromo, ICOs Raised $4 Bln in 2017, What 2018 Has in Store, COINTELEGRAPH (Dec. 31, 2017), https://cointelegraph.com/news/icos-raised-4-bln- in-2017-what-2018-has-in-store [https://perma.cc/45YQ-DTTZ].
7. See generally ICOBENCH, https://icobench.com (last visited Feb. 21, 2018) [http://perma.cc/EX8S-NQUC].

8. Olga Khari

   , Investing in ICOs May Be Even Riskier than You Realize, BLOOMBERG: TECH. (Nov. 6, 2017, 9:27 AM), https://www.bloomberg.com/news /articles/2017-11-06/three- — ourth-o — -digital-tokens-are-riskier-than-you-realized [http://perma.cc/6HQN-DEZM].

9. Timothy B. Lee, How Bitcoins Became Worth $10,000, ARS TECHNICA (Nov. 28, 2017, 8:40 PM), https://arstechnica.com/tech-policy/2017/11/how- bitcoins-became-worth-10000/ [https://perma.cc/Q98G-MY6R] (“Bitcoin serves as the reserve currency — or the cryptocurrency economy in much the same way that the dollar serves as the main anchor currency — or international trade.”).

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Bitcoin also apply to any ICOs that leverage Bitcoin.365 Bitcoin’s regulatory risk is growing as the SEC is shi — ting its attention and resources to Bitcoin.366 Second, ICOs themselves are subject to substantial regulatory risk: SEC Chairman Jay Clayton and Commissioners Kara Stein and Michael Piwowar jointly stated that many ICO promoters are not — ollowing securities laws and — oreshadowed enhanced SEC scrutiny o —

ICOs.367 Moreover, ICO promoters’ unlaw

ul activity puts ICO investors at risk as well.368 Even the research director — or Coin Center, a blockchain advocacy group, acknowledged that “[m]any token sales are outright securities — raud that di —

er little — rom a typical pyramid or Ponzi scheme.”369 Why are ordinary investors throwing billions o — dollars into ICOs when they cannot even understand the “white paper” that explains what the — undraising is about?370 One reason is, simply, hype. Experts may acknowledge that many ICO promoters are merely “putting lipstick on the pig,” but investors take their cues — rom a marketplace where many products are “only popular because [they are] being pumped.”371 In many ways, ICOs are the closest analogue to Hyper — unding. Both rely on big personalities and hype to pump

1. See Sean Williams, The 6 Biggest Risks to Bitcoin, MOTLEY FOOL (Nov. 27, 2017, 10:00 AM), https://www. — ool.com/investing/2017/11/27/the-6-biggest-risks-to- bitcoin.aspx [http://perma.cc/ENR6-JYL3].
2. SEC Warns Bitcoin, Ctryotocurrency Investors at Risk, REUTERS BUS. NEWS (Jan. 4, 2018, 9:59 AM), https://in.reuters.com/article/us-usa-sec-bitcoin/sec- warns-bitcoin-cryptocurrency-investors-at-risk-idINKBN1ET1YI [https://perma.cc/TD8Q-YNKC].
3. Id.

4. Several ICOs have already been revealed as outright

   rauds. For example, the SEC halted PlexCorp’s ICO o — PlexCoin a — ter its — ounders, Dominic Lacroix, a “recidivist Quebec securities law violator,” and Sabrina Paradis-Royer, claimed that PlexCoin would bring in pro — its o — 1,354% within twenty-nine days. See Laura Shin, $15 Million ICO Halted by SEC — or Being Alleged Scam, FORBES: DIGITAL MONEY (Dec. 4. 2017, 2:36 PM), https://www. — orbes.com/sites/ laurashin/2017/12/04/15-million-ico-halted-by-sec- — or-being-alleged- scam/#4cb762a41569 [https://perma.cc/FY5S-BZYL].

5. Id.

6. Why Read the ICO White Paper Be

   ore You Buy The Token?, IKIGUIDE, (Dec. 27, 2017), https://ikiguide.com/2017/12/27/ico-white-paper/ [https://perma.cc/ N3P4-EHQE].

7. Nick Ayton, Good, Bad and Ugly Side o

   ICOs, COINTELEGRAPH (Sept. 23, 2017), https://cointelegraph.com/news/good-bad-and-ugly-side-o — -icos [https:// perma.cc/XC5V-FG6U].

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a “limited opportunity.”372 Both o

er — ew or no disclosures regarding the opportunity. And both claim to be the unregulated presale o — a product, not a regulated investment opportunity. While ICOs probably meet the Howey test and thus are probably sales o — securities as a matter o — law,373 they can be nearly impossible — or the SEC to regulate as a practical matter;374 any regulatory guidance provided is there — ore o —

limited use.375

CONCLUSION

This Article has thus  --- ar demonstrated that Hyper --- unding is an innovative  --- undraising vehicle, but it introduces new risks. Enabled by the internet and  --- ueled by hype, corporations can now raise hundreds o ---  millions o ---  dollars in just a  --- ew days, even i ---  they have nothing to sell but hopes and dreams. In April 2016, Tesla collected $400 million and promised to deliver 400,000 cars, priced at “just $35,000,” within a year.376 But Tesla only delivered 1,772 cars by the end o ---  2017,377 and priced them at $50,000 to start.378 As this Article is going to

1. See, e.g., Beware SCAM! Huge Loss as Cryptocurrency Investors in ICO, STEEMIT (Aug. 27, 2017, 4:56 AM), https://steemit.com/ico/@steemo —

icials/beware- scam-huge-loss-as-cryptocurrency-investors-in-ico-initial-coin-o —

er [https://perma.cc/58PU-ACQS] (“The reason ordinarily web-savvy individuals — all

or scams like these may lie in the time-sensitive nature o — ICO’s. The limited opportunity within token sale events means investors tend to rush into early access trades, making them easy targets — or phishing attacks.”).

1. SEC DAO Report, supra note 41 (

   inding that the sale o — cryptocurrency tokens by the “distributed autonomous organization” (DAO) meets the Howey test

or an investment contract, and that the unregistered sales o — these tokens to the public violated the securities laws).

1. ICOs can be conducted by natural persons residing in the United States, in which case the SEC has jurisdiction over them, but — requently the ICO promoters are non-U.S. persons, — oreign business entities, or autonomous or pseudonymous people, or even completely autonomous decentralized so — tware programs running on other cryptocurrency networks. See Public Statement, supra note 6; see also SEC DAO Report, supra note 41.

2. See Alexander B. Lindgren, Blockchain Regulation: Growing Pains o

   a Financial Revolution, 59 ORANGE COUNTY L. 38 (2017).

3. Golson, supra note 353 (“Musk is ‘

   airly con — ident’ that deliveries will begin by the end o — 2017, and ‘you will not be able to buy a better car — or $35,000, even with no options.’”).

4. Stewart, supra note 93 (“I

   you are eagerly awaiting your Tesla Model 3, it might be time to download that meditation app, because you’re gonna have to relax and get ready to wait.”).

5. Bob Sorokanich, The ‘$35,000 Tesla Model 3’ Still Doesn’t Exist, ROAD & TRACK (Mar. 23, 2018), https://www.roadandtrack.com/new-cars/ — uture-

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print in April 2018, the $35,000 electric car still does not exist because Elon Musk unilaterally decided to break his express promise to produce a “mass market, a —

ordable car.”379 Instead, he decided to build premium vehicles380 and send one o — them into space.381 And there is nothing presale purchasers can do about it, except ask — or their money back—without interest— and wait up to three months to get it.382 Hyper — unding is likely to become more prevalent as blockchain technology enables — undraising through ICOs. Indeed, Tezos raised $232 million through an ICO in July 2017.383 Now, Tezos is going through its own crisis. Kathleen and Arthur Breitman are the husband-and-wi — e team who

cars/a19578653/the-dollar35000-tesla-model-3-still-doesnt-exist/ [https://perma.cc/M2XT-ANBJ] (“The version we drove carried a $52,500 sticker price. Where’s that $35,000 American-built electric car Elon Musk promised us? Still very much not here.”).

1. Rough Transcript o

   Model     3    Launch,     BYP     GROUP, http://bypgroup.com/wp-content/uploads/2016/04/Transcript-on-BYP- letterhead.pd ---  (last visited Mar. 26, 2018) [https://perma.cc/6LNM-VGSX] (“So, now then going  --- rom the S and the X, we  --- inally come to step 3 or the  --- inal step in the master plan – a mass market, a ---
   

ordable car.”).

1. Alan Ohnsman, The Elusive $35,000 Model 3: A Godot-Like Wait

   or the ‘Mass Market’ Tesla, FORBES (Feb. 20, 2018, 9:00 AM), https://www. — orbes.com/ sites/alanohnsman/2018/02/20/the-elusive-35000-model-3-a-godot-like-wait- — or- the-mass-market-tesla/#373c45744251 [https://perma.cc/SQN6-KKHM] (“Right now [Tesla is] — ocused on long-range premium versions that start at $49,000 and can top $60,000 with options. And be — ore the $35,000 base car goes into production, Tesla plans to build dual-motor, all-wheel-drive versions that will also cost more than the Standard.”).

2. E.g., Marina Koren, The Symbolism o

   Elon Musk Sending a Car Into Space, ATLANTIC (Feb. 6, 2018), https://www.theatlantic.com/science/archive/2018/ 02/the-symbolism-o — -elon-musk-sending-a-car-into-space/552479/ [https://perma.cc/FSM4-F4KT] (“Musk, the South A — rican business mogul and progenitor o — perhaps too many companies to name, picked as the payload — or the

irst — light o — his new rocket a cherry-red Tesla convertible.”).

1. Kyle Hyatt, Tesla Model 3 Delays May Mean More Cancelled Reservations, CNET: ROAD SHOW (Feb. 15, 2018), https://www.cnet.com/roadshow/news/tesla- model-3-cancelled-reservations/ [https://perma.cc/LT7E-PNUM] (“Disillusionment is a natural thing to — eel a — ter having bought into Elon’s version o — the D.E.N.N.I.S. System, and as such, many people have reached the Separate Entirely phase and are asking Tesla — or their $1,000 back, though getting that money isn’t proving as easy as they’d hoped . . . . Currently, the company is telling customers that it may be upward o — three months be — ore they see their money i —

they want it by check, or signi

icantly less time i — they want a re — und via debit card.”).

1. Alex Lielacher, Top 5 Biggest ICOs (by Amount Raised), BITCOIN MKT. J. (Dec. 7, 2017, 8:00 AM), https://www.bitcoinmarketjournal.com/biggest-icos/ [https://perma.cc/72H8-YWFC] (“The Tezos project raised over $232 million during its ICO in July 2017.”).

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developed Tezos technology and own all o

its intellectual property.384 But investors would be hesitant to buy Tezos coins (“Tezzies”) i — the Breitmans owned the majority o — these Tezzies and controlled the Tezos Network. Instead, the Breitmans established “The Tezos Foundation,” “an independent Swiss entity whose goal is to promote and — oster the use o — the Tezos blockchain.”385 A — ter the ICO, the Breitmans accused the President o — the Tezos Foundation, Johann Gevers, o — sel — -dealing and excess bonus payments to himsel — , and Gevers responded by suing the Breitmans — or in — ringing on the — oundation’s autonomy.386 Until this dispute gets resolved, Tezzies are — rozen.387 And there is nothing that the more than 30,000 participants in the Tezos ICO can do about it, except wait — or a settlement.388 The parallels between Tezzies and Teslas demonstrate that consumer protection mechanisms — or the new economy are not in place. Corporations—and unincorporated, decentralized organizations—are mastering digital marketing campaigns that bring the “hype” necessary to — undraise quickly and at scale. This is a problem when reality does not live up to the hype. But is also a solution — or — inancing disruptive innovations

1. Paul Vigna, Tezos Raised $242 Million in a Hot Coin O

ering, Then a Fight Broke Out, WALL ST. J. (Oct. 19, 2017, 12:07 AM), https://www.wsj.com/ articles/tezos-raised-232-million-in-a-hot-coin-o —

ering-then-a- — ight-broke-out- 1508354704 [https://perma.cc/K5NE-KJHG] (“The couple control Dynamic Ledger Solutions Inc., which, according to Tezos’s website, ‘owns all o — the Tezos-related intellectual property.’”).

1. The Sel

   -Amending Cryptographic Ledger, TEZOS, https://www.tezos.com/ static/papers/Tezos_Overview.pd — (last visited Mar. 26, 2018) [https://perma.cc /LF2R-Z2VM].

2. Sharon Yin, Tezos, Case Study

   rom a Legal Perspective, YIN LAW FIRM (Oct. 27, 2017), http://cryptocurrencylegalhelp.com/index.php/2017/10/27/tezos- ico-cryptocurrency-a-case-study/ [https://perma.cc/8G6M-PMBR] (“The Breitmans accused Gevers o — sel — -dealing and excess bonus payments while Gevers has — iled a complaint with Swiss regulators citing the Breitman’s in — ringement on the Foundation’s autonomy.”).

3. Colin Harper, Tezos in Turmoil and Project Faces In-Fighting, Token Distribution Delays, COIN CENT. (Jan. 27, 2018), https://coincentral.com/tezos-in- turmoil-as-project- — aces-in- — ighting-token-distribution-delays/ [https://perma.cc/LN6M-89DH] (“Good news is, investor — unds are sa — e yet — rozen until this dispute is resolved, but that’s likely little consolation to contributors who have been waiting — or over hal — -a-year — or their tokens to be distributed.”).
4. Paul Vigna, A $232 Million Cryptocurrency Fight Comes to a Close, WALL ST. J. (Feb. 22, 2018, 3:31 PM), https://www.wsj.com/articles/a-232-million- cryptocurrency- — ight-comes-to-a-close-1519331027 [https://perma.cc/Y5RV-8JW7] (“More than 30,000 participants in that coin o —

ering, one o — the biggest o — 2017, were in limbo while the two sides duked it out.”).

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that can change the world

or the better. Hyper — unding is risky, but it also can be very rewarding. This Article demonstrated how Hyper — unding may have solved the very di —

icult chicken-and-egg problems in two-sided markets that had previously prohibited the mass development o — EVs.389 With the bene — it o — hindsight, Elon Musk’s 2016 publicity stunt might be re — ramed as a great victory in the — ight against pollution and global warming, — or equal access to transportation, — or energy security, — or logistics that lower the price o — basic necessities, and — or human well-being in general. Likewise, the Tezos ICO could lead to a new generation o —

smart applications through better blockchain governance.390 This could result in sa — er payment systems, more e —

icient contracts, clearer property records, and other improvements in

inancial systems. That leads to the question o — what should be done about Hyper — unding. It may not be possible to raise — unds — or these hyper-risky, hyper-rewarding ventures through conventional means. Moreover, not every company that might avail itsel — o —

Hyper

unding will necessarily deliver on its promises. In — act, history has shown that presales in particular have been used to de — raud consumers and investors. The cult o — personality, the power o — the internet, and the corporate liability shield may undermine wise crowds, turning them into herds o —

misin

ormed investors. Limited time, combined with vague or misleading promoter claims, can turn crowd wisdom into in — ormation cascades, irrational behavior, — olly, and crisis. This Article proposes a return to — irst principles upon which securities regulations were — ormed. The progenitors o —

the 1930s securities laws were persuaded by Justice Louis Brandeis: “Publicity is justly commended as a remedy — or social and industrial diseases. Sunlight is said to be the best o —

disin

ectants; electric light the most e —

icient policeman.”391 In — ormation, particularly in — ormation about risk — actors, is lacking in many o — the Hyper — unding ventures seen today.

1. See supra Part II.
2. Alice Lloyd George, Behind the Scenes with Tezos, a New Blockchain Upstart, TECH CRUNCH (July 12, 2017), https://techcrunch.com/2017/07/12/behind- the-scenes-with-tezos-a-new-blockchain-upstart/ [https://perma.cc/7NL5-HWB4].

3. Louis D. Brandeis Legacy Fund

   or Social Justice, Justice Louis D. Brandeis, BRANDEIS U., https://www.brandeis.edu/legacy — und/bio.html (last visited Mar. 26, 2018) [https://perma.cc/7HS8-7U9B] (reprinted — rom THE ENCYCLOPEDIA OF WORLD BIOGRAPHY).

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Tesla consumers do not know how di

icult it is to scale in the auto industry. Tezos investors do not know whether a

oundation’s by-laws provide su —

icient mechanisms — or corporate governance. And no one can know what a Hyper — unding promoter truly intends to do with — unds. There — ore, this Article prescribes an in — ormation solution to the Hyper — unding problem: companies that engage in large internet presales should make disclosures about the risks involved. Promises made to consumers should be clear and unequivocal. Methods involved in the production o — new products should be spelled out in enough detail — or consumers to make in — ormed decisions about whether to “invest” their time and money in the project. This is analogous to the risk-

actor disclosures required by a public company when selling stock, but it should be much more minimal and tailored narrowly to — it the unique needs o — start-up companies and rapid innovators. These Hyper — unding disclosures should be backed up with protections — or consumers when the promoter’s statements are

alse or misleading. Even when a corporation is compelled to speak, its words are still subject to anti- — raud laws. A liability regime similar to 10b-5,392 which enables both private citizens and the SEC to hold sellers o — securities liable — or — raud, should make the Hyper — unding disclosures salient. Corporate — raud liability is only valuable so long as the corporation is solvent, however, and Hyper — unding and similar vaporware presale techniques are likely to be used by minimally capitalized start-up corporations. Indeed, to circumvent the disclosure-and-liability regime discussed above, a promoter could — orm a shell corporation and use it to deploy Hyper — unding. It is possible, perhaps likely, that the market will remedy this because people will simply not give their money to a tiny start-up company with an unknown promoter. But i — reputational e —

ects do not obviate this risk, then a promoter-liability regime — or corporate — raud could be employed when a Hyper — unding corporation is undercapitalized. This would deter bad actors — rom abusing the corporate — orm and the Hyper — unding technique. Finally, i — remedial measures prove ine —

ective, the law could prophylactically require Hyper — unding assets to be

1. 17 C.F.R. 240.10b-5 (2018).

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maintained in escrow until certain milestones or thresholds are met. Collective action problems make it unlikely that thousands o — Hyper — unding consumer-investors would band together and demand these protections, but these protections are exactly what one — inds when looking at collective-action crowd — unding websites like Kickstarter. Further study is required be — ore insisting on any escrow amount or threshold, as this protection could stymie the productive power o —

Hyper

unding to — inance innovations. Tesla has already taken some o — these sensible actions, such as disclosing the amount o — money received, providing updates about production schedules, and demonstrating prototypes. This shows that the market may require Hyper — unding companies to institute certain consumer protections in certain instances in order to be an attractive investment opportunity. This sort o —

lexible, ad hoc, sel — - regulation would be — orestalled by over-inclusive, one-size- — its- all — ederal regulations. But i — companies do not regulate themselves, and i — policy makers do not encourage these sensible actions, the un — ortunate result may be a — ailure or

raud o — such proportions that legislatures will be galvanized to institute Draconian requirements that squelch this nascent and promising contribution to corporate — inance. Entrepreneurship creates opportunities — or people to better themselves. Innovation advances our quality o — li — e. And

inancing is necessary — or both entrepreneurship and innovation. But — inancial innovation can be hard to regulate. On the one hand, — inancing itsel — must evolve to meet the changing needs o — businesses. On the other hand, novel instruments can con — use investors and con — ound regulators. This Article has shown how the uber-entrepreneur Elon Musk invented a new — inancing method, Hyper — unding, to — uel the development o — electric vehicles. Thus, this Article demonstrated that — inancial innovation is essential — or economic and environmental progress. But this Article also showed how new — inancial tools—such as initial coin o —

erings—can be used to accelerate — raud. Moreover, centralized governments are decreasingly capable o — regulating

inancial markets that are becoming increasingly decentralized and transnational. Financial regulation must evolve. This Article has argued that securities laws enacted in response to economic crises in

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the early 20th century are a poor

it — or — inancial markets in this 21st century. In general, the law progresses too slowly to keep up with Hyper — unding. In this new era o — corporate

inance, policymakers should explore new ways to encourage

inancial sel — -regulation.

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