University o --- Minnesota Law School Scholarship Repository Minnesota Law Review: Headnotes 2016 A Place o --- Their Own: Crowds in the New Market --- or Equity Crowd --- unding Seth C. Oranburg Follow this and additional works at: https://scholarship.law.umn.edu/headnotes Part o --- the Law Commons Recommended Citation Oranburg, Seth C., "A Place o --- Their Own: Crowds in the New Market --- or Equity Crowd --- unding" (2016). Minnesota Law Review: Headnotes. 53. https://scholarship.law.umn.edu/headnotes/53 This Article is brought to you --- or --- ree and open access by the University o --- Minnesota Law School. It has been accepted --- or inclusion in Minnesota Law Review: Headnotes collection by an authorized administrator o --- the Scholarship Repository. For more in --- ormation, please contact bkeele@umn.edu. A Place o --- Their Own: Crowds in the New Market --- or Equity Crowd --- unding Seth C. Oranburg† Crowdsourcing’s limits are determined by people’s passion and imagination, which is to say, there aren’t any limits at all. – Je --- --- Howe INTRODUCTION Is small better than large? When it comes to normative business law policy, many seem to think so. Many scholars attribute the 2007–08 --- inancial crisis to mis-regulation o --- large banks. Many others attribute the subsequent economic recovery to jobs created by small businesses. While the “99%” protested big banks on Wall Street, the “Startup America” grassroots campaign --- or small business garnered political support --- or corporate- --- inance legislation. Within a two-year period, Congress passed the JOBS Act1—which tripled private company shareholder limits,2 authorized --- ederal equity crowd --- unding,3 and created the “mini-IPO” Regulation A+4— and the Dodd-Frank Act5—which seeks to end “too big to --- ail” by imposing a multitude o --- requirements on large --- irms.6 In other words, policymakers seem to be trying to encourage the smallest --- irms while discouraging the biggest ones. But this policy decision seems to ignore the --- act that all large --- irms were † Assistant Pro --- essor o --- Law, Duquesne University School o --- Law. Copyright © 2016 by Seth C. Oranburg. 1. Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (2011) [hereina --- ter “JOBS Act”]; Crowd --- unding, 80 Fed. Reg. 71,388 (Nov. 16, 2015) (to be codi --- ied at 17 C.F.R. pts. 200, 227, 232, 239, 240, 249, 269, and 274). 2. JOBS Act, Title II. 3. JOBS Act, Title III. 4. JOBS Act, Title IV. 5. Dodd-Frank Wall Street Re --- orm and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (Dodd Frank Act was enacted a --- ter being signed by the President on July 21, 2010). 6. Id. 147 148 MINNESOTA LAW REVIEW HEADNOTES [100:147 once startups that have elected to “go public” because they determined that the bene --- its o --- being public outweighed the costs o --- public-company regulations. The nature o --- corporate and securities regulation --- orces startups to stay small and private in order to avoid onerous public-company regulations, which actually limits the government’s ability to protect investors. I call this contradictory policy phenomenon “Too Small To Succeed.” In --- uture work, I will develop a uni --- ied theory o --- “Too Small To Succeed” regulations—which are re --- lected in many private-law regulations that have accrued since the recent --- inancial crises—and analyze their unintended consequences. But, --- or the instant purposes o --- this Essay, I will restrict this exploration inso --- ar as it pertains to the regulation o --- online equity crowd --- unding, whereby ordinary Americans will be able to invest in startups that are not yet publicly traded.7 The law is intended to encourage the development o --- startups and to allow more Americans to pro --- it --- rom investing in them. But this rosy picture may not come to pass because too many o --- the traditional investor-protection provisions, that are popular with the too-big-to- --- ail policymakers, ultimately made their way into the --- ederal crowd --- unding law. As a result, a rapid rise o --- the Digital Shareholder is unlikely. Instead, a more likely outcome is that startups and investors will quickly realize that --- ederal crowd --- unding in its present --- orm is too small to succeed. This Essay will discuss how one speci --- ic instance o --- the “Too Small To Succeed” phenomenon resulted in policies that may impede or inhibit equity crowd --- unding. The investors in online equity crowd --- unding—who Pro --- essor Andrew Schwartz terms “Digital Shareholders”8—must create large networks in order to operate e --- --- iciently. Policies must leverage the unique characteristics o --- these Digital Shareholders; otherwise, as Pro --- essor Darian Ibrahim argues, equity crowd --- unding may devolve into a “Market --- or Lemons.”9 I. DIGITAL SHAREHOLDERS Pro --- essors Ibrahim and Schwartz both begin their 7. JOBS Act, Title III. 8. Andrew A. Schwartz, The Digital Shareholder, 100 MINN. L. REV. 609, 679 (2016). 9. Darian M. Ibrahim, Equity Crowd --- unding: A Market --- or Lemons?, 100 MINN. L. REV. 561 (2016). 2016] A PLACE OF THEIR OWN 149 inquiries on the vitality o --- --- ederal crowd --- unding with a discussion o --- the well-recognized “trio o --- problems” in entrepreneurial --- inance as developed by Pro --- essor Ronald Gilson and others.10 In short, startup investors have three economic problems, which pro --- essional and public-company investors can generally mitigate, but Digital Shareholders might not be able to avoid. First, there is an in --- ormation asymmetry problem: entrepreneurs know more than investors about what entrepreneurs will do,11 which is why pro --- essional investors join the board and oversee the entrepreneurs.12 Second, there is great uncertainty as to whether the venture will succeed,13 so pro --- essional investors invest in stages, over time.14 Third, there are agency costs (speci --- ically, residual loss);15 entrepreneurs have incentives to shirk and sel --- -deal,16 especially when the investor does not understand the entrepreneurs’ technology,17 so pro --- essionals generally invest in --- amiliar technical areas.18 These problems and their solutions 10. Ronald J. Gilson, Engineering a Venture Capital Market: Lessons --- rom the American Experience, 55 STAN. L. REV. 1067, 1076 (2003); see Robert P. Bartlett, III, Venture Capital, Agency Costs, and the False Dichotomy o --- the Corporation, 54 UCLA L. REV. 37, 41 n.9 (2006) (“This model . . . can be --- ound in virtually any academic discussion . . . .”). 11. See, e.g., Adrian Chiang, How Entrepreneurs Can Crowd --- und Renewable Energy Projects, 8 J. BUS. ENTREPRENEURSHIP & L. 659, 683 (2015). 12. NOAM WASSERMAN, THE FOUNDER’S DILEMMAS: ANTICIPATING AND AVOIDING THE PITFALLS THAT CAN SINK A STARTUP 145 (2012). 13. See Chiang, supra note 11, at 683. 14. WASSERMAN, supra note 12, at 145; Startup Financing, in STARTUP CREATION FOR THE SMART ECO-EFFICIENT BUILT ENVIRONMENT (F. Pacheco Torgal ed., 2016). 15. Residual losses are agency costs resulting --- rom divergent interests o --- principals and agents that persist even when principals expend e --- --- ort to monitor and bond the agent. See Jay B. Kesten, Managerial Entrenchment and Shareholder Wealth Revisited: Theory and Evidence --- rom a Recessionary Financial Market, 2010 BYU L. REV. 1609 (2010). 16. See Agency Costs, INVESTOPEDIA.COM, http://www.investopedia.com/ terms/a/agencycosts.asp (last visited Aug. 13, 2016). 17. American Experience: Henry Ford (PBS television broadcast Jan. 29, 2013), http://www.pbs.org/wgbh/americanexperience/ --- eatures/transcript/ henry --- ord-transcript/ (“His investors want to make an expensive car to sell to wealthy people. Ford disagrees --- undamentally. He wants to create a car --- or the people. . . . He’s trying to per --- ect an invention. In order to keep doing the trial runs and get it better, it’s going to take a lot o --- capital to keep testing, keep testing. . . . Narrator: Finally realizing they were being duped, his backers pulled the plug.”). 18. Venture Capital, U.S. SMALL BUS. ADMIN., http://www.sba.gov/ content/venture-capital (last visited Aug. 13, 2016). 150 MINNESOTA LAW REVIEW HEADNOTES [100:147 are interrelated (e.g., staged --- inancing addresses both uncertainty and shirking), and these strategies have been --- ormalized in the standard --- orms --- or venture capital --- inancing.19 The Digital Shareholder probably cannot mitigate the trio o --- problems in the traditional ways. Given a legal limit o --- $10,000 per investor per year, it is doubt --- ul that the digital shareholder will have the time, inclination, or ability to join two or three corporate boards, manage a multi-staged private- investment port --- olio, and get technical expertise in the latest app-coding languages. In addition, crowd --- unding theoretically has the additional problem o --- competition with pro --- essional investment.20 The most promising startups receive multiple o --- --- ers --- rom the most prominent venture-capital investors, who contribute not only money but also pro --- essional services, work space, mentorship, advice, management, and, o --- course, access to yet more money. O --- --- line, nodes o --- well-connected venture capitalists (VCs) with MBAs --- rom Stan --- ord share in --- ormation about leads over lattes in Palo Alto. They meet --- ounders daily, and their --- inancial resources are virtually unlimited. Their associates process data --- rom expensive, manicured databases21 into custom analytics reports, --- ine-tuned to each principal’s predilections.22 The Digital Shareholder, on the other hand, goes to Crowd --- under.com and clicks “Search.” Can Digital Shareholders—who are by de --- inition amateurs—compete with investment pro --- essionals in --- inding, acquiring, servicing, and monitoring the best investment opportunities? This picture may seem pretty bleak, but Pro --- essor Schwartz identi --- ies --- ive novel solutions that the Digital Shareholder may employ to solve the trio o --- problems: (1) the wisdom o --- the crowd,23 (2) the crowdsourcing o --- in --- ormation,24 19. NAT’L VENTURE CAPITAL ASS’N, MODEL LEGAL DOCUMENTS, http:// nvca.org/resources/model-legal-documents/ (last visited Aug. 13, 2016). 20. In other work I have explained how crowd --- unding and venture capital could be engineered to work in tandem. See Seth C. Oranburg, Bridge --- unding: Crowd --- unding and the Market --- or Entrepreneurial Finance, 25 CORNELL J. L. & PUB. POL’Y 397 (2015). 21. Some o --- the research tools that pro --- essional investors use include PitchBook, CapitalIQ, Option Impact, and SharkRepellant. 22. ASKIVY, Role Descriptions in Venture Capital (VC), http://www.askivy .net/articles/venture-capital/venture-capital-explained/role-descriptions-in- venture-capital (last visited Aug. 13, 2016). 23. Schwartz, supra note 8, Part IV.A. 2016] A PLACE OF THEIR OWN 151 (3) online reputation,25 (4) securities-based compensation,26 and (5) digital monitoring.27 These Digital Shareholder strategies may come into play both during the campaign and a --- ter the company receives the money. While Pro --- essor Schwartz’s solutions are theoretically sound, there is a practical problem to their implementation: all o --- these solutions require operations on a large scale, and the --- ederal law is speci --- ically designed to limit --- ederal crowd --- unding to a small scale. There --- ore, without modi --- ication to the --- ederal law, Pro --- essor Schwartz’s solutions cannot be e --- --- ectively used by the Digital Shareholder. Additionally, some o --- the heuristic behaviors that Digital Shareholders may use to make investment decisions may be problematic themselves. A. THE WISDOM OF CROWDFUNDING Pro --- essor Schwartz rightly points out that “[a] well- established body o --- scienti --- ic literature shows that groups are better at --- inding --- acts and making predictions than lone individuals, even experts.”28 But the wisdom o --- crowds is only expressed where crowds can grow su --- --- iciently large,29 evaluate in --- ormation that can be per --- ectly known,30 or are organized around a thought leader.31 Currently, our securities laws seem to preclude these --- eatures, making it di --- --- icult --- or crowd --- unding to converge on wise decisions. Instead, our securities laws seem more likely to encourage herding behavior, which is the key ine --- --- iciency that arises within crowds.32 24. Id. at Part IV.B. 25. Id. at Part IV.C. 26. Id. at Part IV.D. 27. Id. at Part IV.E. 28. Id. at 659 (citing JAMES SUROWIECKI, THE WISDOM OF CROWDS: HOW THE MANY ARE SMARTER THAN THE FEW AND HOW COLLECTIVE WISDOM SHAPES BUSINESS, ECONOMIES, SOCIETIES AND NATIONS 31 (2004)) (“[A] large group o --- diverse individuals will come up with better and more robust --- orecasts and make more intelligent decisions than even the most skilled [individual acting alone].”); Karsten Hue --- --- er et al., The Wisdom o --- Crowds: Predicting a Weather and Climate-Related Event, 8 JUDGMENT & DECISION MAKING 91, 91 (Mar. 2013). For crowd --- unding, where investors will have to gauge the --- uture per --- ormance o --- various startup companies, predictions will be more important than --- act- --- inding. 29. Schwartz, supra note 8, at 659. 30. Id. 31. Id. 32. Ilan Lobel & Evan Sadler, In --- ormation Di --- --- usion in Networks through Social Learning, 10 THEORETICAL ECON. 807, 808 (2015) (“According to the 152 MINNESOTA LAW REVIEW HEADNOTES [100:147 Crowd Science, also known as “Citizen Science,” explains that groups o --- people (such as Digital Shareholders in crowd --- unding) convey in --- ormation to each other through their behaviors.33 This is the colloquially called “wisdom o --- the crowd.” When one member o --- a group witnesses the behavior o --- another, the --- irst member may assume the second member is acting on in --- ormation that is private to that second member. The --- irst member, who may also have some private in --- ormation, may in --- er the second member’s private in --- ormation --- rom the action that is observed. The --- irst actor may then take a similar action based both on private in --- ormation and in --- erred in --- ormation. A --- amiliar example makes this theory clear. When a person decides to watch a video on a web site like YouTube, that person can see how many others have watched that video, which suggests something about the quality o --- that video. That person may decide to watch the most-watched video because the group in --- ormation suggests that video is the highest quality.34 This may seem quite innocuous, but as the crowd gets larger, the in --- ormation --- rom crowd behavior begins to overwhelm the actor’s private in --- ormation. The extreme --- orm o --- this group-think behavior is called an “in --- ormation cascade,” where even rational individuals will choose to abandon their private in --- ormation (or not make e --- --- orts to gather private in --- ormation in the --- irst place) and instead to --- ollow the crowd.35 In this case, the wisdom o --- the crowd can be sublimated into herd behavior. Crowd science theory deems a crowd “success --- ul” when it “aggregates” “asymptotic in --- ormation.” In other words, --- rom a systems-sciences perspective, a “wise” crowd is one that e --- --- iciently produces and distributes unique in --- ormation about the true state o --- the world. last two decades o --- economics scholarship, herding is the key ine --- --- iciency that arises in social learning models.”). 33. Eric Hand, Citizen Science: People Power, 466 NATURE 685, 685–87 (2010). 34. R. Crane and D. Sornette, Viral, Quality, and Junk Videos on YouTube: Separating Content From Noise in an In --- ormation Rich Environment, AAAI (2008), https://www.aaai.org/Papers/Symposia/Spring/ 2008/SS-08-06/SS08-06-004.pd --- . 35. DAVID EASLEY & JON KLEINBERG, NETWORKS, CROWDS, AND MARKETS: REASONING ABOUT A HIGHLY CONNECTED WORLD 6 (2010). 2016] A PLACE OF THEIR OWN 153 Crowd science literature o --- --- ers empirical --- indings about the wisdom o --- crowds. Data shows that the wisdom o --- crowds converges on an accurate decision as the size o --- the crowd becomes arbitrarily large.36 In other words, larger networks make better decisions. Un --- ortunately --- or equity crowd --- unding, the initial network size is zero, and government regulations will likely keep --- ederal equity crowd --- unding small.37 In crowd-science talk, individual belie --- s are “bounded” when no one individual has certainty as to the right answer, and they are “unbounded” when some members have absolute certainty about the true state o --- the world. O --- course, --- ew things we might want to ask o --- crowds are as binary and obviously knowable as 0 or 1. In --- initely unbounded belie --- s are an assumption some crowd scientists make, but no human opinion is ever truly knowable and correct in an absolute sense. Knowledge o --- which crowd --- unding company is worth investing in cannot be absolutely certain, so assuming bounded belie --- s seem to better re --- lect the reality o --- crowd --- unding. When belie --- s are bounded, there may be a problem called “herding” or “in --- ormation cascades.” Herding is when individuals merely mimic others’ actions, ignoring their own private in --- ormation, as opposed to “learning aggregation,” when the crowd converges on the right result by leveraging both public and private in --- ormation.38 More recent studies have determined that social networks within crowds can improve in --- ormation aggregation and lead to asymptotic learning where there are “in --- luential agents” or “in --- ormation leaders,” so long as that agent is not excessively in --- luential.39 In other words, when there is an individual amid the crowd who is observed by most or all other members o --- the 36. Daron Acemoglu et al., Bayesian Learning in Social Networks, 78 REV. ECON. STUDS. 1201, 1203 (2011) (“We say that there is asymptotic learning [in --- ormation aggregation] i --- as the size o --- the society becomes arbitrarily large, equilibrium actions converge (in probability) to the action that yields the higher pay-o --- --- .”). 37. Seth C. Oranburg, Democratizing Startups, 68 RUTGERS U. L. REV. ( --- orthcoming 2016). 38. Sushil Bikhchandani et al., A Theory o --- Fads, Fashion, Custom, and Cultural Change as In --- ormation Cascades, 100 J. POL. ECON. 992 (1992); Abhijit V. Banerjee, A Simple Model o --- Herd Behavior, 107 Q. J. ECON. 797 (1992). See also Lones Smith & Peter Sørensen, Pathological Outcomes o --- Observational Learning, 68 ECONOMETRICA 371 (2000). 39. Acemoglu, supra note 36, at 1218–19; Lobel & Sadler, supra note 32, at 809. 154 MINNESOTA LAW REVIEW HEADNOTES [100:147 crowd as a thought leader, even a relatively small crowd with bounded belie --- s may exhibit the wisdom o --- the crowd. To summarize this in simpler terms, crowd --- unding networks seem to have the qualities—namely, small size and bounded belie --- s—that encourage herding behavior, which is ine --- --- icient and undesirable. Government policies that keep crowd size small are likely to --- urther prevent the wisdom o --- the crowd --- rom discovering the true state o --- the world (i.e., which investments are good and which are bad). To alleviate this problem, regulations could allow or even encourage crowd --- unding networks to grow large. An alternative solution, which I have expressly proposed in prior work40 and which Pro --- essor Ibrahim alludes to in A Market --- or Lemons,41 is to require crowd --- unding companies to have an in --- luential agent. These modi --- ications to the law will help the Digital Shareholder bene --- it --- rom the wisdom o --- the crowd. B. CROWDSOURCING Crowdsourcing—where a group or “crowd” o --- users collaborate to produce in --- ormation that is bene --- icial to the whole community42—is a more promising ability o --- the Digital Shareholder because, and Pro --- essor Schwartz points out, the Securities and Exchange Commission (SEC) has expressly endorsed the sharing o --- in --- ormation about investment opportunities among Digital Shareholders.43 But the SEC’s endorsement o --- crowdsourcing44 is mere verbiage unless the in --- ormation networks are structured in a way that --- acilitates in --- ormation di --- --- usion without causing undesirable in --- ormation cascades. 40. Oranburg, supra note 37. 41. Ibrahim, supra note 9, at 600. 42. Anhai Doan, Raghu Ramakrishnan, & Alon Y. HaLevy, Crowdsourcing Systems on the World-Wide Web, 54 COMMC’NS OF THE ACM 86 (Apr. 2011). 43. Schwartz, supra note 8, at 663. 44. Crowd --- unding, 80 Fed. Reg. 71,388 (Nov. 16, 2015) (to be codi --- ied at 17 C.F.R. pts. 200, 227, 232, 239–40, 249) (“Individuals interested in the crowd --- unding campaign—members o --- the ‘crowd’—may share in --- ormation about the project, cause, idea or business with each other and use the in --- ormation to decide whether or not to --- und the campaign based on the collective ‘wisdom o --- the crowd,’”); id. at 71,547 (Crowd --- unding portals may “[p]rovide communication channels by which investors can communicate with one another and with representatives o --- the issuer through the --- unding portal’s plat --- orm about o --- --- erings through the plat --- orm . . .”). 2016] A PLACE OF THEIR OWN 155 Pro --- essors Lobel and Sadler introduced the metric o --- “di --- --- usion” to the literature on theoretical economics.45 Previously, social networks were deemed success --- ul when they produced “aggregation,” which is when the true state o --- the world is revealed across a whole population.46 Complete aggregation does not generally occur in the real world;47 theories that predict complete aggregation rely on unrealistic assumptions o --- per --- ect network topology48 or signals o --- unbounded strength.49 On the other hand, di --- --- usion—which is when all members o --- society obtain in --- ormation such that they are able to achieve the same ex ante probability o --- making a good decision as an expert—can be used to evaluate the success o --- networks where strong signal are rare but in --- ormative.50 Applying the theory o --- di --- --- usion to the SEC’s crowdsourcing mandate (as codi --- ied in the C.F.R.)51 reveals some theoretical concerns about its system design and suggests that additional empirical research is needed. The SEC’s system design calls --- or Digital Shareholders to share in --- ormation with each other. Pro --- essor Schwartz deals handily with the preliminary concerns that shareholders will guard and not share their private in --- ormation: no one shareholder can --- und a company and so a shareholder who wants a company to succeed must in --- orm others about its value; in short, “crowd --- unding promotes cooperation.”52 But what is the nature o --- the in --- ormation that is communicated? The shareholders generating this in --- ormation are legally permitted to invest somewhere between $2500 and $5000 per year in all their crowd --- unding investments.53 Ideally, Digital Shareholders diversi --- y this investment in at least ten to twenty separate companies.54 I --- a shareholder invests only 45. Lobel & Sadler, supra note 32, at 811. 46. EASLEY & KLEINBERG, supra note 35, at 6 (“What we see in these --- igures is a growing awareness and adoption o --- a new innovation that is visible in aggregate, across a whole population.”). 47. But see Exodus 19:11 (“And be ready against the third day: --- or the third day the LORD will come down in the sight o --- all the people upon mount Sinai.”). 48. Acemoglu, supra note 36, at 1201. 49. Smith & Sørensen, supra note 38, at 371. 50. Lobel & Sadler, supra note 32, at 807, 809. 51. 17 C.F.R. Parts 200, 227, 232, 239, 240, 269, and 274 (2016). 52. Schwartz, supra note 8, at 666. 53. Id. 54. Oranburg, supra note 20; Usha Rodrigues, Securities Law’s Dirty 156 MINNESOTA LAW REVIEW HEADNOTES [100:147 about $250 per company, that shareholder is rationally motivated to spend no more than $250 in e --- --- ort to research, select, and transmit in --- ormation about that investment opportunity. To put this number in perspective, a stock-market analyst who works --- or an exchange earns about $115,000 per year55 and covers about 30 companies,56 which equates to about $4000 per company covered. Additionally, a pro --- essional analyst is generally better trained in analyzing equities than an average person who may participate in crowd --- unding. Accordingly, the signals --- rom shareholders are likely to be weak and --- requent. Recall that di --- --- usion is most likely to occur when signals are strong and in --- requent. In the absence o --- aggregation or di --- --- usion, in --- ormation cascades are likely to occur.57 Pro --- essor Schwartz recognizes that “[a]nchoring and in --- ormation cascades like this could undermine the e --- --- ectiveness o --- crowdsourcing investor in --- ormation,” although he concludes that “there is good reason to think that anchoring and in --- ormation cascades will not be --- atal in the context o --- crowd --- unding because investors are likely to --- eel and act independent --- rom one another.”58 I tend to disagree with this conclusion because shareholders who are investing only about $250 per company have no rational reason to expend the e --- --- ort required to think independently and instead will employ groupthink heuristics to make investment decisions; however, the behavior o --- crowd --- unding investors remains an unsolved empirical question that requires --- urther study. Additionally, as Pro --- essor Schwartz points out, there may be non-pecuniary Little Secret, 81 FORDHAM L. REV. 3395–96 (2013). 55. Louis Horkan, The Salary o --- a Stock Market Analyst, HOUSTON CHRONICLE: WORK, http://work.chron.com/salary-stock-market-analyst-8556 .html (last visited Aug. 13, 2016). 56. THE VAULT MBA CAREER BIBLE 162 (2005). 57. Acemoglu, supra note 36, at 1203 (“The main result o --- Smith and Sorensen is that when each individual observes all past actions and private belie --- s are unbounded, in --- ormation will be aggregated and the correct action will be chosen asymptotically. In contrast, the results in Bikhchandani, Hirshlei --- er and Welch (1992), Banerjee (1992), and Smith and Sorensen (2000) indicate that with bounded belie --- s, there will not be asymptotic learning (or in --- ormation aggregation). Instead, as emphasized by Bikhchandani, Hirshlei --- er and Welch (1992) and Banerjee (1992), there will be ‘herding’ or ‘in --- ormational cascades,’ where individuals copy past actions and/or completely ignore their own signals.”). 58. Schwartz, supra note 8, at 668–69. 2016] A PLACE OF THEIR OWN 157 motivates, such as generating a positive online reputation, that may overcome the rational apathy o --- Digital Shareholders. C. NON-PECUNIARY MOTIVATIONS Pro --- essor Schwartz comprehensively addresses the role o --- online reputation in promoting in --- ormation sharing in crowd --- unding networks.59 Additionally, gami --- ication—the use o --- game design elements in non-game contexts60—is an additional non-pecuniary motivation that may encourage Digital Shareholders to share in --- ormation. Gami --- ication methods create a positive user experience that improves user retention and utilization.61 Recent studies have shown that gami --- ication works --- or implantations in commerce,62 sharing,63 innovation,64 ideation,65 data gathering,66 and other contexts related to equity crowd --- unding. Gami --- ication can --- acilitate online reputation by “scoring” the reputation o --- users; in --- act, there are business-method patents to this e --- --- ect.67 Gami --- ication o --- reputation has been 59. Id. at Part IV.C. 60. Sebastian Deterding et al., From Game Design Elements to Game --- ulness: De --- ining “Gami --- ication,” in PROCEEDINGS OF THE 15TH INT’L ACAD. MINDTREK CONF.: ENVISIONING FUTURE MEDIA ENV’TS 9 (2011), http://dl.acm.org/citation.c --- m?id=2181040. 61. Sebastian Deterding et al., Gami --- ication: Using Game-Design Elements in Non-Gaming Contexts, in CHI ’11 EXTENDED ABSTRACTS ON HUMAN FACTORS IN COMPUTING SYS. 2425 (2011), http://dl.acm.org/citation .c --- m?id=1979575. 62. Juho Hamari, Trans --- orming Homo Economicus into Homo Ludens: A Field Experiment on Gami --- ication in a Utilitarian Peer-To-Peer Trading Service, 12 ELEC. COM. RES. APPLICATIONS 236 (2013). 63. Markus Montola et al., Applying Game Achievement Systems to Enhance User Experience in a Photo Sharing Service, in PROCEEDINGS OF THE 13TH INT’L ACAD. MINDTREK CONF.: EVERYDAY LIFE IN THE UBIQUITOUS ERA 94 (2009), http://dl.acm.org/citation.c --- m?id=1621859.94-97. 64. J.H. Jung, Christopher Schneider & Joseph Valacich, Enhancing the Motivational A --- --- ordance o --- In --- ormation Systems: The E --- --- ects o --- Real-time Per --- ormance Feedback and Goal Setting in Group Collaboration Environments, 56 MGMT SCI. 724 (2010). 65. Maximilian Witt, Christian Scheiner & Susanne Robra-Bissantz, Gami --- ication o --- Online Idea Competitions: Insights --- rom an Explorative Case, 41 Jahrestagung der Gesellscha --- t --- ür In --- ormatik (October 4–7, 2011). 66. Theo Downes-Le Guin et al., Myths and Realities o --- Respondent Engagement in Online Surveys, 54 INT’L J. MKT. RES. 1 (2012). 67. Method and System --- or Managing Domain Speci --- ic and Viewer Speci --- ic Reputation on Online Communities, U.S. Patent No. 20080109245 A1 ( --- iled Nov. 3, 2007) (issued May 8, 2008), https://www.google.com/patents/ US20080109245. 158 MINNESOTA LAW REVIEW HEADNOTES [100:147 applied in varied contexts such as encouraging so --- tware developers to include comments in their code68 and creating leaderboards to encourage classroom learning.69 Gami --- ication has even been used to attract and retain reliable crowdsourcing tasks such as relevance assessment and clustering, which could be directly applied to crowdsourcing --- or the Digital Shareholder.70 In sum, while the SEC does not mandate crowdsourcing, it also does not prevent it. So long as there is su --- --- icient competition in the market --- or crowd --- unding portals, some enterprising portals may employ gami --- ication to encourage Digital Shareholders to contribute high-quality e --- --- orts to investment crowdsourcing, which may indeed help Digital Shareholders overcome in --- ormation asymmetry and agency costs in crowd --- unding. D. INCENTIVES AND MANAGEMENT The Digital Shareholder has two additional devices that may help crowd --- unding succeed. First, Pro --- essor Schwartz suggests that an entrepreneur who uses crowd --- unding should promise to “eat its own cooking” by being compensated with the same type o --- security that Digital Shareholders receive.71 Second, digital monitoring—allowing investors to oversee entrepreneurs through an “online chat group” and similar means—could also be used to ensure that entrepreneurs do not shirk. The SEC does not require this. Whether or not entrepreneurs, Digital Shareholders, and the other participants in the equity-investment ecosystem (venture capitalists and angel investors) will pre --- er this arrangement is essentially an empirical question that has not been answered. Until the data show these requirements are help --- ul or necessary as de --- ault 68. Christian Reinhard Prause, Improving the Internal Quality o --- So --- tware through Reputation-based Gami --- ication, (Mar. 21, 2013) (unpublished Ph.D. dissertation, Aachen University), http://citeseerx.ist.psu .edu/viewdoc/download?doi=10.1.1.465.7157&rep=rep1&type=pd --- . 69. Ilaria Caponetto, Je --- --- rey Earp & Michela Ott, Gami --- ication and Education: A Literature Review, in PROCEEDINGS OF THE 8TH EUR. CONF. ON GAMES-BASED LEARNING 50 (2014). 70. Carsten Eickho --- --- et al., Quality through Flow and Immersion: Gami --- ying Crowdsourced Relevance Assessments, in PROCEEDINGS OF THE 35TH INT’L ACM SIGIR CONF. ON RES. AND DEV. IN INFO. RETRIEVAL 871, http://dl.acm.org/citation.c --- m?id=2348400. 71. Schwartz, supra note 8, at 679. 2016] A PLACE OF THEIR OWN 159 provisions, it is not prudent to mandate these arrangements in all sales o --- crowd --- unding stock. On the other hand, creating a new role --- or an overseer and evaluator o --- crowd --- unding investments—an idea which I develop more --- ully in Democratizing Startups72 and to which Pro --- essor Ibrahim also alludes to in A Market --- or Lemons73— solves many o --- the in --- ormation-asymmetry and agency-cost problems in crowd --- unding while providing precisely the type o --- strong in --- ormation signal that has been theoretically and empirically proven in the crowd science literature to improve crowdsourcing outcomes. II. THE EQUITY CROWDFUNDING MARKET While the --- ederal law that enables equity crowd --- unding was passed on April 5, 2012,74 that law simply required the SEC to promulgate --- inal rules that allow equity crowd --- unding to occur.75 The SEC’s --- inal rules just went into e --- --- ect on May 16, 2016.76 There is still very little data on how this brand-new exemption is --- unctioning, but an analysis o --- the non-equity crowd --- unding campaigns that succeeded previously and an examination o --- the equity crowd --- unding campaigns that have already launched provides several valuable insights into the new equity crowd --- unding market. First, comparing the top 10 crowd --- unded campaigns with the top 10 venture-backed companies reveals that these di --- --- erent modalities o --- --- undraising are used --- or very di --- --- erent purposes. A list o --- the most success --- ul crowd --- unding campaigns (as measured by amount raised) consists almost entirely o --- consumer-technology products (e.g., the Pebble smartwatch, the Coolest cooler, the World’s Best Travel Jacket, the Pono Music Player, the Sondors Electric Bike) and entertainment (e.g., the Exploding Kittens video game, the Veronica Mars Movie Project, Reading Rainbow, the Super Troopers 2 movie).77 In 72. Oranburg, supra note 37 (proposing a “private independent analyst” or PIA). 73. Ibrahim, supra note 9, at 600 (proposing a “Nominated Advisor” or NOMAD). 74. 17 C.F.R. Parts 200, 227, 232, 239, 240, 249, 269, and 274 (2016). 75. Id. 76. Catherine Cli --- --- ord, Starting May 16, Entrepreneurs Can Raise Money in a Whole New Way. Here’s What You Need to Know, ENTREPRENEUR (May 5, 2016), https://www.entrepreneur.com/article/275215. 77. Most Success --- ul Crowd --- unding Campaigns, CROWDFUNDING BLOG 160 MINNESOTA LAW REVIEW HEADNOTES [100:147 stark contrast, the Wall Street Journal’s second annual ranking o --- the top venture-capital-backed companies shows that “investors are chasing a --- ter Internet --- irms.”78 Digital Shareholders almost never invest in business-to-business (B2B) solutions, which is one o --- the top investment categories --- or VCs. In --- act, “[t]he top three [VC- --- unded] companies are all business- product makers: Genband Inc., a supplier o --- voice-over- Internet-protocol technology to telecom companies; Xirrus Inc., a provider o --- wireless networking equipment; and Tabula Inc., which makes semiconductors --- or electronic products.”79 It is readily apparent that a battery-powered cooler with a built-in radio (the a --- orementioned crowd --- unded Cooler Cooler) is an entirely di --- --- erent sort o --- project than supplying B2B VoIP services. Second, the success rate o --- crowd --- unding projects (as measured by their ability to raise --- unds) is much higher than the success rate o --- companies seeking VC --- unding. Crowds have already shown a strong pre --- erence --- or --- unding companies that are required to return all the --- unds i --- the companies do not meet an overall --- undraising goal by raising money --- rom a large number o --- people, whereas venture-capital --- irms generally invest solo or in small groups simultaneously. On Kickstarter, arguably the most popular non-equity crowd --- unding plat --- orm with over $2 billion pledged to projects,80 companies must reach a pre-established --- undraising goal be --- ore any money is released to the company.81 Even so, an incredible 44% o --- Kickstarter (Feb. 18, 2016), http://crowd --- undingblog.com/most-success --- ul-crowd --- unding- projects/. 78. Colleen Debaise & Scott Austin, The Top 50 Venture-Backed Companies, WALL ST J. (Mar. 10, 2011), http://www.wsj.com/articles/ SB10001424052748703300904576178673309577828. 79. Zoran Basich & Emily Maltby, Looking --- or the ‘Next Big Thing’? Ranking the Top 50 Startups, WALL ST J. (Sept. 27, 2012), http://www.wsj.com/ articles/SB10000872396390444813104578018940187057924. 80. Stats, KICKSTARTER, https://www.kickstarter.com/help/stats?re --- = --- ooter (last visited Aug. 13, 2016) (showing that through Kickstarter’s plat --- orm, over $2 billion has been pledged to various projects). 81. Funding, KICKSTARTER, https://www.kickstarter.com/help/handbook/ --- unding (last visited Aug. 13, 2016) (explaining that Kickstarter will not release any money until the project’s goal has been reached); How Likely Is Your Crowd --- unded Campaign to Succeed?, CAN. MEDIA FUND, http:// crowd --- unding.cm --- - --- mc.ca/ --- acts_and_stats/how-likely-is-your-crowd --- unding- campaign-to-succeed (last visited Aug. 13, 2016) (“Kickstarter campaigns, on the other hand, must reach their goal to receive any --- unds. This threshold requirement may also in --- luence owners o --- Kickstarter campaigns to work harder to reach their objectives, or to set lower goals, as they will not receive 2016] A PLACE OF THEIR OWN 161 projects met their --- unding goal in 2013.82 Comparatively, only about 1.5% o --- venture-capital --- unding goes to seed-stage startups.83 While there is not any data directly showing how many companies looked --- or VC --- inancing and --- ailed to receive it, some commentators have calculated that about “99.93% o --- [startup companies] will never get VC.”84 Additionally, there is a troubling gender gap in VC investment that is actually reversed within the crowd --- unding context. Despite the --- act that 36.3% o --- businesses in the United States are owned by women,85 women-led companies received only 7% o --- all the venture capital --- unding in the United States.86 In an empirical test, men who pitched to VCs received --- unding 60% more o --- ten than women did.87 In another experiment that o --- --- ered investors the same pitch with a man’s voice and with a woman’s voice, 68% o --- investors pre --- erred to --- und the venture pitched by a man’s voice.88 In stark contrast, 70% o --- women-led startups on the CircleUp Portal received --- unding, where only 58% o --- men-led startups received capital.89 Crowd --- unding thereby demonstrates its potential to “democratize startups.”90 any --- unding unless they are ‘completely’ success --- ul.”). 82. Robert Strohmeyer, The Crowd --- unding Caveat: Most Campaigns Fail, PC WORLD (Sept. 26, 2013), http://www.pcworld.com/article/2049399/the- crowd --- unding-caveat-most-campaigns- --- ail.html. For up-to-date, daily updated statistics, see also Stats, KICKSTARTER, https://www.kickstarter.com/help/stats (last visited Aug. 13, 2016). 83. 2014 MoneyTree Report, PRICEWATERHOUSECOOPERS (Feb. 2016), https://www.pwcmoneytree.com/Reports/FullArchive/National_2014-4.pd --- (showing that $719 million out o --- $48.349 billion venture-capital --- unding goes to seed-stage startups). 84. Dileep Rao, Why 99.5% o --- Entrepreneurs Should Stop Wasting Time Seeking Venture Capital, FORBES (July 22, 2013), http://www. --- orbes.com/sites/ dileeprao/2013/07/22/why-99-95-o --- -entrepreneurs-should-stop-wasting-time- seeking-venture-capital/#12e54458296d (“[T]he probability o --- an average new business getting VC is about 0.0005 (300/600,000).”). 85. Fact Sheet: Women-Owned Businesses, NAT’L WOMEN’S BUS. COUNCIL (2012), https://www.nwbc.gov/sites/de --- ault/ --- iles/FS_Women-Owned_Businesses .pd --- . 86. Shaunacy Ferro, Your Startup is More Likely to Get Funding i --- You Are a Man, FASTCO DESIGN (Mar. 11, 2014), http://www. --- astcodesign.com/ 3027458/your-startup-is-more-likely-to-get- --- unding-i --- -youre-a-man. 87. Id. 88. Id. 89. Susan Caminiti, Women Rule When It Comes to Crowd --- unding, CNBC (Sept. 4, 2014), http://www.cnbc.com/2014/09/03/women-rule-when-it-comes-to- crowd --- unding.html. 90. See Oranburg, supra note 37. 162 MINNESOTA LAW REVIEW HEADNOTES [100:147 Third, the --- ailure rate o --- crowd --- unded companies (as measured by their ability to deliver products as promised), is also much lower than the --- ailure rate o --- venture-backed companies (as measured by their ability to return their investors’ capital). According to recent reports, “three-quarters o --- venture-backed --- irms in the U.S. don’t return investors’ capital.”91 The --- ailure rate among angel- --- unded companies seems to be even higher: out o --- 100 average angel- --- unded companies, “two will eventually return just the capital that was originally invested, leaving only three as pro --- itable exits.”92 Meanwhile, Kickstarter reports that only 9% o --- success --- ully --- unded projects --- ail to deliver rewards to their backers.93 Other independent sources have put the overall crowd --- unding --- ailure- to-timely-deliver rate at a much-higher 39%.94 In any event, the --- ailure rate o --- crowd --- unding projects to deliver on promises is remarkably lower than the --- ailure rate o --- VC- --- unded companies to make a return on investment. It bears repeating that the data above regards non-equity crowd --- unding. It is critical to re-evaluate these empirical studies when data on equity crowd --- unding is available. Still, it is sensible to hypothesize that many o --- these above-mentioned non-equity crowd --- unding trends will also be --- ound in equity crowd --- unding because these two --- undraising modalities share so many observable characteristics. In any event, it is su --- --- icient --- or the instant purposes o --- this Essay to demonstrate that crowd --- unding and venture-capital investment are quite di --- --- erent, and there --- ore might be best understood as occurring in completely separate marketplaces. 91. Deborah Gage, The Venture Capital Secret: 3 out o --- 4 Startups Fail, WALL ST. J. (Sept. 20, 2012), http://www.wsj.com/articles/ SB10000872396390443720204578004980476429190; see also John McDermott, Report: 75% o --- Venture-Backed Start-Ups Fail, INC. (Sept. 20, 2012), http://www.inc.com/john-mcdermott/report-3-out-o --- -4-venture-backed- start-ups- --- ail.html. 92. David S. Rose, The Startup Failure Rate Among Angel-Funded Companies, GUST BLOG (Aug. 17, 2015), http://blog.gust.com/the-startup- --- ailure-rate-among-angel- --- unded-companies/. 93. Luke Graham, Just 9% o --- Success --- ully Funded Kickstarter Projects Fail to Deliver, CNBC (Dec. 10, 2015), http://www.cnbc.com/2015/12/10/9- percent-kickstarter-projects- --- ail-to-deliver.html; see also The Kickstarter Ful --- illment Report, KICKSTARTER, https://www.kickstarter.com/ --- ul --- illment (last visited Aug. 13, 2016). 94. Strohmeyer, supra note 82 (“The --- irst backers to receive their packs waited two months past the initial delivery estimate, while 39 percent are still waiting.”). 2016] A PLACE OF THEIR OWN 163 A. DUMB MONEY, WISE CROWDS None o --- the crowd-science theory o --- in --- ormation aggregation and di --- --- usion matters i --- there are no good investments available through crowd --- unding. Pro --- essor Ibrahim argues that equity crowd --- unding has a “market --- or lemons” problem.95 The classic example o --- a lemons market is the 1970s used car lot downtown. Buyers assume those cars are low quality, so the seller discounts them. But one cannot sell high quality products at discount prices, so the high-quality products exit the market, and only the “lemons” are le --- t. Pro --- essor Ibrahim argues that dumb money may turn crowd --- unding into a market --- or lemons. In response to Pro --- essor Ibrahim’s argument that crowd --- unding is “dumb money,” see Part II o --- this Essay; see also Section (A)(2)(b)(ii) o --- his Article, which also acknowledges that crowds can be wise. But crowds are not necessarily wise, especially where regulations are imposed on them in ways that prevents networks --- rom aggregating and disseminating in --- ormation e --- --- iciently. Pro --- essor Ibrahim’s point that dumb money can ruin valuations in a shallow market should be taken quite seriously. As discussed above, policymakers appear not to --- ully understand the nature o --- crowds in terms o --- the systems and structures that best evidence their wisdom. I --- crowds cannot aggregate and di --- --- use valuable in --- ormation about the true value o --- the companies who seek crowd --- unding investments, then crowd --- unding may --- ail. There --- ore, policymakers should --- ocus on making “smart regulations” that leverage the wisdom o --- crowds to prevent the “dumb money” problem. B. A DISTINCT MARKET FOR CROWDFUNDING Even i --- crowds are “dumb,” there are still reasons to believe the crowd --- unding will not be a market --- or lemons, mainly because the crowd --- unding market is in --- act a di --- --- erent market that other investment markets. Pro --- essor Ibrahim’s core argument is that owners o --- good companies will not o --- --- er investment opportunities in such companies to Digital Shareholders because these “dumb money” investors will not be able to distinguish between good and bad companies. Digital Shareholders will not value good companies more than bad 95. Ibrahim, supra note 82, at 593. 164 MINNESOTA LAW REVIEW HEADNOTES [100:147 companies, so owners o --- good companies will only seek capital --- orm pro --- essional investors, who can appreciate their quality and will pay --- or it. Critically, this argument rests on the assumption that the properties which make a company “good” or “bad” are the same --- or Digital Shareholders and pro --- essional investors. But this is not the case. Crowd --- unding is economically valuable precisely because it makes --- unding available to an entirely new genre o --- companies; namely, the companies that pro --- essional investors have long eschewed. In George Akerlo --- ’s classic example o --- the lemons market --- or used automobiles, there are just --- our kinds o --- cars: new, good cars; new, bad cars; used, good cars; and used, bad cars.96 In this schema, all car buyers want a “good” car. This simpli --- ication makes sense where most buyers can agree that a “good” car is one that is mechanically sound. But there is no such analogy to crowd --- unding, where diverse Digital Shareholders have a multitude o --- reasons --- or investing in a particular company. Pro --- essionals such as VCs seek to maximize return on investment (ROI) o --- about 25% to 30% by investing in a port --- olio o --- companies and monitoring them closely, expecting some to totally --- ail and others to return 20X the initial investment.97 VCs invest in: industries that are more competitively --- orgiving than the market as a whole. . . . In e --- --- ect, venture capitalists --- ocus on the middle part o --- the classic industry S-curve. They avoid both the early stages, when technologies are uncertain and market needs are unknown, and the later stages, when competitive shakeouts and consolidations are inevitable and growth rates slow dramatically.98 Digital Shareholders seem to operate quite di --- --- erently. They o --- ten choose to invest in local companies,99 women- or minority-owned companies,100 and companies that make 96. George A. Akerlo --- , The Market --- or ‘Lemons’: Quality, Uncertainty and Market Mechanism, 84 Q. J. Econ. 488, 489 ( 1970). 97. Bob Zider, How Venture Capital Works, HARV. BUS. REV., Nov.–Dec. 1998, https://hbr.org/1998/11/how-venture-capital-works. 98. Id. 99. See, e.g., How to Invest Local, LOCAVESTING, http://www.locavesting .com/how-to-invest-local/ (last visited Aug. 13, 2016) (“There are a growing number o --- alternatives --- or individuals who want to invest locally.”); Invest in Texas Businesses, NEXTSEED.COM, https://www.nextseed.com (last visited Aug. 13, 2016). 100. Bret Conklin, Three Ways Crowd --- unding Empowers Women & Minority Entrepreneurs, CROWDFUND INSIDER (June 17, 2016), http://www .crowd --- undinsider.com/2016/06/87003-three-ways-crowd --- unding-empowers- 2016] A PLACE OF THEIR OWN 165 consumer products,101 even though --- ew o --- these investments can ever achieve 20X returns. Web sites that --- acilitate these local investments (“Portals”) generally do not promise to “maximize returns,” but rather make more modest claims like “earn solid returns.”102 The investment goals o --- Digital Shareholders may not be to earn 25% ROI over a 10-year term; rather, they may seek to --- oster local companies, support an underserved demographic, or to produce a consumer product they will enjoy owning. There --- ore, equity crowd --- unding may not have the severe in --- ormation asymmetries o --- Pro --- essor Ibrahim’s concern.103 Digital Shareholders can observe prior to investing whether a company is operated locally, owned or run by women, or produces an enticing consumer good. Portals can easily determine and convey such in --- ormation. In --- act, many state laws require Portals to con --- irm that online equity investment opportunities are in-state companies.104 Returning to the classic Akerlo --- analogy, it now seems that equity crowd --- unding is more like a market --- or new cars than --- or old ones, at least on the dimensions that are most relevant to Digital Shareholders’ investment decisions. A new-car buyer women-minority-entrepreneurs/ (discussing a 2014 report by Crowd --- und Capital Advisors that predicted that crowd --- unding would help red --- ine the capital disparity that exists --- or both minorities and women trying to --- ind investors). 101. Id. (noting that crowd --- unding has the ability through broadening the base o --- investors to open avenues --- or raising capital that the venture community has traditionally not provided --- or women and minorities); Salvador Rodriguez, Tech Diversity: New SEC Crowd --- unding Rules are a Big Win --- or Minority and Women Entrepreneurs, INT’L BUS. TIMES (Oct. 30, 2015), http:// www.ibtimes.com/tech-diversity-new-sec-crowd --- unding-rules-are-big-win- minority-women-entrepreneurs-2163390 (noting that crowd --- unding has already proved bene --- icial --- or underrepresented groups in the U.K. as more than hal --- o --- the businesses that raised --- unding through Syndicate Room—the leading U.K. equity crowd --- unding plat --- orm, had a --- emale --- ounder or lead investor); see also Will Schroter, Top 10 Business Crowd --- unding Campaigns o --- All Time, FORBES (Apr. 16, 2014), http://www. --- orbes.com/sites/wilschroter/ 2014/04/16/top-10-business-crowd --- unding-campaigns-o --- -all-time/ #3a259950203d. 102. NEXTSEED.COM, https://www.nextseed.com (last visited Aug. 13, 2016). 103. Ibrahim, supra note 9, at 651. 104. See, e.g., The Illinois Securities Law o --- 1953, 815 ILL. COMP. STAT. 5/1–5/19 (2016), as amended by the Illinois Intrastate Equity Crowd --- unding Bill, 815 ILL. COMP. STAT. 5/2.34 et. seq. (stating that i --- the issuer issues securities through a registered Internet portal, that portal veri --- ies that the purchaser is a resident o --- the state o --- Illinois). 166 MINNESOTA LAW REVIEW HEADNOTES [100:147 can readily determine whether a model is a convertible or a sedan (even i --- it is “impossible --- or a buyer to tell the di --- --- erence between a good and a bad [used] car”).105 Likewise, there is no in --- ormation asymmetry regarding whether an investment opportunity is --- or a local brewery,106 a personal aircra --- t,107 or a mission to mars.108 I --- Digital Shareholders are more concerned with the nature o --- the company they --- und than with the probably o --- making outsized returns, then equity crowd --- unding is really a di --- --- erent market --- rom venture-capital --- unding, and the lemons concern (where “good” companies seek VC investment and “bad” companies seek crowd --- unding investment) is diminished. CONCLUSION This Essay suggests that equity crowd --- unding could become an important part o --- the innovation economy i --- the regulatory systems are engineered properly. In prior work, I have pointed out numerous ways they are mis-engineered. Here, I hope to have made two new points: First, Internet crowds are as wise as we engineer the user experience to be. It --- ollows that i --- crowds are regulated to be dumb, they will make dumb investment decisions. There --- ore, the argument that we should protect crowd --- unding investors via regulation must be evaluated through the crowd-science lens: we should only regulate crowd behavior where doing so clearly improves in --- ormation aggregregation and does not cause in --- ormation cascades. Second, Crowd --- unding is not merely about making money. Crowd --- unding provides a new model --- or the economy, emerging --- rom our new capacity to stream the wisdom o --- crowds through Internet Portals to crowd-source investment decisions. This democratizes access to investment and encourages equity investments that are not based purely on the venture-capital 105. Akerlo --- , supra note 96, at 489. 106. See CRAFTFUND.COM, http://cra --- t --- und.com (last visited Aug. 13, 2016). 107. XTI Aircra --- t Exceeds $1 Million in Equity Crowd --- unding Investments; Will Accelerate Development o --- Tri --- an 600 Prototype, XTI AIRCRAFT (Apr. 21, 2016), http://www.xtiaircra --- t.com/2016/04/21/xti-aircra --- t-exceeds-1-million- equity-crowd --- unding-investments-will-accelerate-development-tri --- an-600- prototype/. 108. AlgaStar, CROWDFUNDER, https://www.crowd --- under.com/algastar/ invest (last visited Aug. 13, 2016) (describing crowd --- unding project as “[m]ission to Mars—biotechnology R&D company --- or producing --- ood, Co2 to pure oxygen & valuable biochemicals --- or earth & space utilization”). 2016] A PLACE OF THEIR OWN 167 model o --- return on investment, opening up new possibilities --- or --- unding new catagories o --- companies and entrepreneurs. It is --- olly to evaluate crowd --- unding purely with venture-capital metrics like return on investment. Crowd --- unding systems should be evaluated by their capacity to reveal what people want and believe and by their ability to capitalize diverse entrepreneurs and ideas.