Washington Law Review


The United States has an unparalled entrepreneurial ecosystem. Silicon Valley startups commercialize cutting-edge science, create plentiful jobs, and spur economic growth. Without angel investors and venture capital funds (VCs) willing to gamble on these high-risk, high-tech companies, none of this would be possible. From a law-and-economics perspective, startup investing is incredibly risky. Information asymmetry and agency costs abound. In the United States, angels and VCs successfully mitigate these problems through private ordering and informal means. Countries without the robust private venture capital system that exists in the United States have attempted to fund startups publicly by creating junior stock exchanges where startup stocks can be traded—similar to the New York Stock Exchange, but on a smaller scale. These exchanges have largely failed, however, in part because they have relied on mandatory disclosure and other tools better suited to mitigating investment risk in established public companies. The relative success of the United States in supplying private venture capital makes its recent infatuation with crowdfunding curious. Fortunately, while crowdfunding was originally designed to resemble public venture capital, with “funding portals” acting as the junior stock exchanges, its final implementing rules took important steps back toward the private venture capital model.

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