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The Gatekeepers of Crowdfunding


Andrew A. Schwartz


December 3, 2018

Securities crowdfunding is premised on two core policy goals: inclusivity and efficiency. First, crowdfunding is conceived as an inclusive system where all entrepreneurs are given a chance to pitch their idea to the “crowd.” Second, crowdfunding is supposed to be an efficient way to channel funds from public investors to promising startup companies. There is a fundamental tension between these two policy goals, however. A totally inclusive system would ensure that platforms list any and every company that wants to participate. But platforms need to curate and select the companies they list in order to establish a reputation as a reliable market for investors. This gatekeeping function aids efficiency, but is exclusive by its nature. Hence, the tension between inclusive and efficient crowdfunding.

This Article provides a theoretical and an empirical analysis of inclusivity versus efficiency in crowdfunding. It also compares the American crowdfunding system with its counterpart in New Zealand using original research collected by the author during a six-month residency in that country. This research reveals that crowdfunding in New Zealand is much more financially successful than in the United States. This Article explains this outperformance on the basis that New Zealand’s system is focused solely on efficiency, even at the expense of inclusivity. In the United States, by contrast, we closed our eyes to the tension between efficiency and inclusivity and tried to achieve both at the same time. In practice, and perhaps as could have been expected, this has led to only minor success on both fronts.

Broadening the analysis out, we see that inclusive crowdfunding is a luxury that only certain countries can manage, depending on their existing systems for entrepreneurial finance. The United States has a huge and sophisticated venture capital industry and thus can afford to sacrifice some efficiency in our crowdfunding system in order to advance inclusivity. But New Zealand has long had very little venture capital investment and hence a real need to develop crowdfunding as an effective new means for efficiently channeling capital to the country’s startup companies. The need to consciously trade off inclusivity and efficiency is an important lesson from the present research.