Crowdfunding --a Dead Leaden Anchor on Your Boat?

News Brief

By Cydney Posner

Here is an interesting article from Bloomberg BusinessWeek regarding one of the potential negative aspects of crowdfunding.  As the lure of crowdfunding has taken hold, the main concerns that immediately come to mind are the risk of fraud or the possibility of tripping the wire for Exchange Act registration. This article focuses on a different challenge: the prospect that companies that have raised funds from scores of small investors could face serious issues if they subsequently try to raise substantial funds. According to the article, the presence of numerous small investors could "spook the angels and venture capitalists those businesses need to raise millions of dollars later on." VCs may find it easier to pass on a deal rather than "wade into the complications of crowdfunding, such as getting small investors to approve a new round of funding." VCs also questioned the relative risk tolerance of small investors as compared with their own funds. However, some VCs cited in the article say they wouldn't necessarily object, as long as the small holders do not have voting control or the companies do not otherwise require that votes be rounded up from lots of individual investors to approve new actions. To ensure that result, voting provisions would be necessary to place control in the hands of the board and major shareholders. Even so, some VCs would just stay away. As one angel investor quoted in the article noted: "'Do the VCs really want to mess with 75 crowdfunding investors? They have enough heartburn when there's 10 angels on the table. That to me is the big risk for entrepreneurs….You've just hung a dead leaden anchor on the end of your boat.'"

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