Articles
Pontus Braunerhjelm & Johan E. Eklund, Taxes, Tax Administrative Burdens and New Firm Formation, 67 Kyklos 1 (2014).
Abstract (adapted from authors): This paper examines the tax administrative burden and its effect on new firm formation. It is well recognized that entrepreneurship and new firm formation are critical factors in determining economic growth and development. New firm entry into the marketplace enhances welfare in two distinct ways: 1) by promoting innovation, productivity and economic growth and 2) by increasing competition, which lowers prices and expands output. It is also well documented that barriers to entry reduce the likelihood that new firms will enter various sectors. The authors argue that the burden imposed by tax codes and tax compliance constitutes a barrier to entry that has been neglected in the previous literature. They use data from the World Bank to measure the administrative burden that the complexity of tax policy imposes on new firms. Additionally, the authors use a measure of new firm formation - entry density. The data cover 118 countries over a period of six years. The authors find that the entry rate is significantly reduced by the tax administrative burden and that this effect is unrelated to general taxes on corporate profits and is robust to the inclusion of several important control variables.
Cécile Carpentier & Jean-Marc Suret, Entrepreneurial Equity Financing and Securities Regulation: An Empirical Analysis, 30 Int'l Small Bus. J. 41 (2012).
Abstract (adapted from authors): To protect investors, securities regulation generally restrains entrepreneurial ventures from entering the stock market. Scholars and regulators contend that strong rules and requirements for listing are essential to prevent the market from failing. However, these constraints can also unduly impede the growth of new ventures. The authors use the Canadian case to examine the effects of the relaxation of the regulatory constraints. Unlike in other countries, firms in Canada can list at a very early stage, without revenues, with a minimal size and even without writing a prospectus using the reverse merger technique. This provides a unique opportunity to examine entrepreneurial ventures listed on a public market. The quality of firms, their post-listing operating performance and strategy, and their fate largely support the opinion that strong listing requirements are essential to prevent the emergence of a lemon market. Investors involved in this market obtain very poor returns. This indicates that they are neither able to set correct prices in this market nor deal with the high level of information asymmetry therein. The reluctance of most regulators to relax the requirements for small business finance can therefore, be justified.
Andrew C. Fink, Protecting the Crowd and Raising Capital Through the Crowdfund Act, 90 U. Det. Mercy L. Rev. 1 (2012).
Abstract (adapted from author): You are an entrepreneur with an innovative business idea, but you have no assets. You need cash to bring your idea to the production line, but no bank or wealthy investor will listen. Would you think it possible to raise over $200 million from five million strangers using just your idea, a website, and social media? That is exactly what happened in 2009 when marketing executives Michael Migliozzi II and Brian Flatow solicited individual investors using their website, BuyABeerCompany.com, to fund a potential purchase of beer company Pabst Blue Ribbon. The average pledge from individuals was just $40, and in return, investors were promised “a certificate of ownership as well as beer of a value equal to the amount invested.” The Securities and Exchange Commission (SEC) stepped in to halt the campaign because it violated securities law, but the message was clear: business ideas can be funded by connecting the entrepreneur to the masses through the Internet and social media platforms. Entrepreneurs and investors took notice of the event, and in July 2010, the Sustainable Economies Law Center sent a petition to the SEC requesting a federal securities exemption for small businesses seeking up to $100,000 in funding with individual investments of $100. Congress could not ignore the economic potential of this untapped resource, and (for once) is attempting to position itself in front of social media transformations. The Jumpstart Our Business Startups Act, commonly referred to as the JOBS Act, is an amalgamation of prior proposals. Title III of the JOBS Act is called the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,” or in shorter form, the CROWDFUND Act. The bill was signed into law on April 5, 2012, and stands to revolutionize small business and entrepreneurial capital-raising by permitting any individual to invest in private companies over the Internet with limited regulatory hurdles. While crowdfunding in the form of charitable contribution and political fundraising is not a new concept, the notion of equity crowdfunding, where investors have an expectation of profit, is a young solution to the financing problems that small businesses and entrepreneurs face. Lawmakers have spent the last two years brainstorming ways to promote crowdfunding investing as a responsible capital raising avenue and potential jumpstart to the economy. The JOBS Act, as cemented into law, will create a new and largely unexplored market for raising capital. Part I of this Article introduces the Crowd and the crowdfunding concept, and also discusses the U.S. legal framework that has yet to account for the global influence of the Crowd. Part II analyzes the JOBS Act and the proposals that led to its creation. Part III analyzes crowdfunding concerns and the efforts to balance investor protection with capital raising.
Max Gerwin, Note, The Small Business Jobs and Credit Act: A Legal and Economic Analysis of The Stimulus Bill from Both a Microeconomic and Macroeconomic Perspective, 6 Entrepren. Bus. L.J. 175 (2011).
Abstract: This article analyzes how the Small Business Jobs and Credit Act of 2010 will affect entrepreneurs. Specifically, it looks at the ways the Act tries to improve entrepreneur’s access to credit. It also provides some tax relief to entrepreneurs in some situations. However, in the author’s eyes, the new law does not do enough to stimulate lending to entrepreneurs or increase demand for business.
David Groshoff, Kurtis R. Urien & Alex Nguyen, Crowdfunding 6.0: Does the SEC's FinTechLaw Failure Reveal the Agency’s True Mission to Protect — Solely Accredited — Investors? (2014), available at http://ssrn.com/abstract=2483371.
Abstract (by authors): This article builds on the authors’ prior research employing case studies, either singly or globally, to serve as the analytic to newly trending matters in law and entrepreneurship. Specifically, this article serves as the third installment of the trilogy in FinTech law, analyzing potential consequences of the Equity Crowdfunding portion of the JOBS Act, including the Securities and Exchange Commission’s (SEC’s) proposed regulations regarding equity crowdfunding for non-accredited investors.
This manuscript identifies that the current statutory and regulatory regime governing FinTech crowdfunding platforms is inequitable to the vast majority of the U.S. population. The manuscript then employs two case studies, one real and one hypothetical, to illustrate that the SEC’s deliberate indifference to, or astounding technological incompetence regarding, applying legal regimes to emerging technology and economic growth. These case studies evidence pain points faced by both potential investors and investees and in both the equity and debt portion of an enterprise’s capital structure.
The authors’ thesis concludes that either the SEC is woefully classist in favor of the proverbial “Top 1%,” or the agency is sadly incompetent in understanding the needs of entrepreneurs, people with small amounts of investment capital, and congressional mandates imposed on the SEC. The manuscript proposes interpretive, administrative, and congressional alternatives that the authors believe better comport with the intent of the JOBS Act. Despite President Obama’s August 2014 pronouncement that the business community complains about regulation, this manuscript turns the president’s logic on its head and demonstrates that the business community and the U.S. economy have suffered because of the lack of congressionally mandated regulation by the SEC.
Darian M. Ibrahim, Financing the Next Silicon Valley, 87 Wash. U.L. Rev. 717 (2010).
Abstract (from author): Silicon Valley's success has led other regions to attempt their own high-tech transformations, yet most imitators have failed. Entrepreneurs may be in short supply in these "non-tech" regions, but some non-tech regions are home to high-quality entrepreneurs who relocate to Silicon Valley due to a lack of local financing for their start-ups. Non-tech regions must provide local finance to prevent entrepreneurial relocation and reap spillover benefits for their communities. This Article compares three possible sources of entrepreneurial finance - private venture capital, state-sponsored venture capital, and angel investor groups - and finds that angel groups have distinct advantages when it comes to funding innovation in non-tech regions. This entrepreneurial finance story is then supplemented by a "law and entrepreneurship" story - specifically, a look at securities laws that might impede optimal levels of angel group financing.
Michael Klausner & Stephen Venuto, Liquidation Rights and Incentive Misalignment in Start-up Financing, 98 Cornell L. Rev. 1399 (2013).
Abstract (adapted from authors): This article analyzes how the accumulation of liquidation rights in a start-up can result in a suboptimal contract among the company’s investors and its management team. Liquidation rights determine the allocation of the proceeds when a start-up is sold. Because a sale is the most common form of exit for investors, these rights are a key factor in determining the return to investors, the return to the company’s management team and employees, and the incentives of all parties involved. As a start-up grows and negotiates multiple rounds of financing, liquidation rights accumulate. In the aggregate, these rights can create a misalignment of interests and a suboptimal outcome for investors, the management team, and employees. The source of this problem is the sequential nature of the contracts involved; each round of investment involves a new negotiation of liquidation rights. As new investors negotiate their rights, however, earlier investors’ rights are rarely renegotiated. In order to protect themselves from the impact of later investors’ liquidation rights, earlier investors often seek rights that turn out to be counterproductive. This article analyzes this phenomenon and suggests a contractual mechanism to coordinate liquidation rights over time so that the sequential negotiation of liquidation rights is less likely to result in a reduction in firm value.
Mathew J. Manimala & Sunita Panicker, Successful Turnarounds: The Role of Appropriate Entrepreneurial Strategies (IIM Bangalore, Research Paper No. 337, 2011), available at http://ssrn.com/abstract=2121111.
Abstract (by author): All organizations are set up with an objective to create value to the society. This necessitates organizations to generate revenues to support all of its stakeholders. However, in the rat race to succeed, most organizations are unable to generate revenues for sustainable operations. It is obvious that organizations cannot survive without profits/surpluses and the inability to generate surpluses would lead to industrial sickness. Bringing such organizations back to health requires entrepreneurial strategies at two levels, namely, from the negative to the breakeven and from breakeven to the positive. Hence, the turnaround management is a doubly entrepreneurial act. The objective of this paper is to understand the strategies used in successful turnarounds and compare them with those of the failed ones and thereby help turnaround managers to increase their success rate so as to enhance the value of these organizations to society.
Tanya M. Marcum & Eden S. Blair, Entrepreneurial Decisions and Legal Issues in Early Venture Stages: Advice That Shouldn’t Be Ignored, 54 Bus. Horizons 143 (2011).
Abstract (from author): Entrepreneurs appear to make decisions based on concrete, but frequently inappropriate, factors such as comparison of bottom-line dollar value or relatively small fees; in this scenario, short-term decisions are made that do not take into account intricate legal and strategic implications which may arise down the road. The authors suggest a different approach whereby entrepreneurs take the time to learn about and understand the implications of these decisions on long-term sustainability, liability protection, and growth potential. They discuss how using cost to compare and make decisions has an impact on three issues with legal implications that occur early in the start-up process, and which pose major implications for the entrepreneur if he or she does not deal with them properly. The authors propose some solutions to help prevent this from happening.
Andrew A. Schwartz, The Digital Shareholder, 100 Minn. L. Rev. 609 (2015).
Abstract (adapted from author): The Jumpstart Our Business Startups (JOBS) Act of 2012 amended federal securities law to allow entrepreneurs to sell up to $ 1 million in unregistered securities to the public over the Internet. No longer will an entrepreneur be stymied by a lack of personal wealth or connections (or proximity to Silicon Valley). And the community of investors - coined here as "digital shareholders" - will be inclusive and diverse as well. People of modest means will for the first time be legally authorized to invest in startups that are currently offered exclusively to wealthy "accredited" investors. But can crowdfunding really live up to this sort of rhetoric? Many legal scholars think crowdfunding will fail and have made a sport of tallying reasons why: fraud, costs, dilution, adverse selection, opportunism, and more.
This article first systematically analyzes the three fundamental problems of finance in the context of crowdfunding. Second, it examines the solutions employed in the analogous contexts of VC, angel investing, and public companies, and determines their relevance for crowdfunding. Third, and most importantly, it introduces a novel set of "digital" methods to address the three challenges that are well-suited to crowdfunding's institutional context. The article describes a set of five novel methods for addressing uncertainty, information asymmetry, and agency costs in the crowdfunding context. These novel mechanisms are not taken from traditional sources but rather are designed specifically for crowdfunding's distinctive digital context.
Symposium, Business Lawyering and Value Creation For Clients, 74 Or. L. Rev. 1 (1995).
Edward Xia, Note, Can the L3C Spur Private Foundation Program-related Investment?, 2013 Colum. Bus. L. Rev. 242 (2013).
Abstract (by author): The L3C, a modified form of the LLC, is a new hybrid entity that has been formed in several states. Its major aim is to facilitate capital-raising for social causes in both non-profit and for-profit sectors. In order to accomplish this, the L3C must attract significant program-related investments (“PRIs”), which are investments private foundations can make that further the foundation’s social mission, and thus do not subject the foundation to a variety of penalty taxes. This Note argues, however, that the L3C will not cause private foundations to make significantly more PRIs. The IRS standard for PRIs requires private foundations to make a case-by-case determination of the nature of the investment, which L3C legislation does not respond to. Additionally, expenditure-responsibility requirements impose on private foundations a level of due diligence that is at odds with L3C advocates’ claims of a more streamlined decision-making process for making PRIs into L3Cs. Federal legislation is necessary to make the L3C more effective in spurring PRI, but such legislation is unlikely to be passed.