{"id":1227,"date":"2019-11-06T09:51:32","date_gmt":"2019-11-06T14:51:32","guid":{"rendered":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/in-print\/volume-108\/volume-108-issue-1-november-2019\/weakness-in-numbers-the-risks-investors-bounded-rationality-and-cognitive-biases-pose-to-the-u-s-securities-crowdfunding-market\/"},"modified":"2025-05-12T11:14:05","modified_gmt":"2025-05-12T15:14:05","slug":"weakness-in-numbers-the-risks-investors-bounded-rationality-and-cognitive-biases-pose-to-the-u-s-securities-crowdfunding-market","status":"publish","type":"page","link":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/in-print\/volume-108\/volume-108-issue-1-november-2019\/weakness-in-numbers-the-risks-investors-bounded-rationality-and-cognitive-biases-pose-to-the-u-s-securities-crowdfunding-market\/","title":{"rendered":"Weakness in Numbers: The Risks Investors\u2019 Bounded Rationality and Cognitive Biases Pose to the U.S. Securities Crowdfunding Market"},"content":{"rendered":"

Increased communication facilitated by the rise of the Internet has developed the necessary infrastructure to gather a virtual \u201ccrowd.\u201d This has permitted crowdfunding, which was previously a method of offering credit to low-income families, to thrive and adapt to new uses.\u00a0<\/span>Rewards-based crowdfunding has developed as a method for entrepreneurs to gauge the viability of proposed businesses prior to launching a venture.\u00a0<\/span>Under this crowdfunding model, the crowd contributed money to entrepreneurs in return for a \u201cnon-monetary reward.\u201d\u00a0<\/span>However, when some crowdfunded ventures reaped immense returns through acquisitions by established companies, the crowd was dismayed to be excluded from these rewards.\u00a0<\/span>This helped spur a shift in securities law. Although historically only wealthy or experienced \u201caccredited investors\u201d\u00a0<\/span>could participate in funding start-up businesses in return for equity, the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012 authorized retail securities crowdfunding and granted \u201cordinary Americans\u201d the ability to \u201cinvest in entrepreneurs they believe in\u201d <\/span>and to finally reap monetary rewards in return for their support. . . . .\u00a0<\/span><\/p>\n

The goal of this Note is to identify how the SEC\u2019s restrictions on securities crowdfunding fail to address, and potentially hinder, the formation of a wise crowd. Although the SEC\u2019s restrictions are reasonable given the investment risks involved, in practice, they do not adequately account for investors\u2019 bounded rationality and cognitive biases. This Note concludes that further regulatory intervention is necessary to guide the crowd because interested parties in the market are unlikely to invest in correction absent regulatory mandates. Online intermediaries lack sufficient financial and reputational incentives to incur the costs of improving the crowd\u2019s wisdom.\u00a0<\/span>Therefore, this Note will address potential regulatory intervention to facilitate formation of a wise crowd. Solutions should target increasing the number of investors conducting research or reducing the interdependence of investor decisionmaking. However, regulators should also consider whether securities crowdfunding is defensible given the inherent obstacles to fostering crowd wisdom, or whether the exemption should be discontinued.<\/p>\n

Continue reading Weakness in Numbers: The Risks Investors\u2019 Bounded Rationality and Cognitive Biases Pose to the U.S. Securities Crowdfunding Market<\/span>(This link opens in a new tab)<\/span><\/span><\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Increased communication facilitated by the rise of the Internet has developed the necessary infrastructure to gather a virtual \u201ccrowd.\u201d This has permitted crowdfunding, which was previously a method of offering […]<\/p>\n","protected":false},"author":627,"featured_media":0,"parent":1206,"menu_order":3,"comment_status":"closed","ping_status":"closed","template":"abstract.php","meta":{"_acf_changed":false,"_price":"","_stock":"","_tribe_ticket_header":"","_tribe_default_ticket_provider":"","_tribe_ticket_capacity":"0","_ticket_start_date":"","_ticket_end_date":"","_tribe_ticket_show_description":"","_tribe_ticket_show_not_going":false,"_tribe_ticket_use_global_stock":"","_tribe_ticket_global_stock_level":"","_global_stock_mode":"","_global_stock_cap":"","_tribe_rsvp_for_event":"","_tribe_ticket_going_count":"","_tribe_ticket_not_going_count":"","_tribe_tickets_list":"[]","_tribe_ticket_has_attendee_info_fields":false,"footnotes":"","_tec_slr_enabled":"","_tec_slr_layout":""},"class_list":["post-1227","page","type-page","status-publish","hentry"],"acf":[],"ticketed":false,"_links":{"self":[{"href":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/wp-json\/wp\/v2\/pages\/1227","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/wp-json\/wp\/v2\/users\/627"}],"replies":[{"embeddable":true,"href":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/wp-json\/wp\/v2\/comments?post=1227"}],"version-history":[{"count":2,"href":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/wp-json\/wp\/v2\/pages\/1227\/revisions"}],"predecessor-version":[{"id":1230,"href":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/wp-json\/wp\/v2\/pages\/1227\/revisions\/1230"}],"up":[{"embeddable":true,"href":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/wp-json\/wp\/v2\/pages\/1206"}],"wp:attachment":[{"href":"https:\/\/www.law.georgetown.edu\/georgetown-law-journal\/wp-json\/wp\/v2\/media?parent=1227"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}