Previously posted on SSRN.


Equity crowdfunding is broken. The current model imposes too many burdens on entrepreneurs in exchange for too little money. For alternative models, this Article looks to the time-tested venture capital financial contract, and the recent experience of initial coin offerings (ICOs). ICOs made headlines over the past two years, as the means by which blockchain technology companies raised billions of dollars to launch new cryptocurrency ventures. Although their novelty as a monetary and investing device is well known, ICOs also presented significant, unappreciated insights into financial contracting.

ICOs furnished an unprecedented experiment into how bargains would look if entrepreneurs raised money for a venture directly from the general public without government regulation. Although the setting was novel, the financial contracts of the blockchain replicated mechanisms familiar from the venture-capital context that protect investors against uncertainty, information asymmetry, and agency costs. ICO financial contracts suggest that familiar VC contractual provisions such as vesting of founder ownership interests, voting rights, and redemption rights are versatile tools that can protect investors in a variety of settings—including equity crowdfunding. Thus, even if ICOs may not prove a lasting phenomenon, regulators can apply their financial contracting lessons to capital-raising from the crowd. Doing so has the potential both to increase entrepreneurial access to capital and to democratize the investing playing field.