Microfinance Legal Resource Materials
Entrepreneurship Law Editorial Team
Ray Boshara et al., REALIZING THE PROMISE OF MICROENTERPRISE DEVELOPMENT IN WELFARE REFORM (1997).
Abstract: Examines the use of microenterprise development as a welfare-to-work strategy and identifies ways that microenterprise promotes self-sufficiency. Concludes with policy recommendations for welfare reform.
Susan R. Jones, A LEGAL GUIDE TO MICROENTERPRISE DEVELOPMENT: BATTLING POVERTY THROUGH SELF-EMPLOYMENT (1998).
Abstract: Addresses microenterprise and seeks to offer guidance to lawyers who volunteer to represent microentrepreneurs and microenterprise development organizations that facilitate the development of these small businesses. The aspects covered in this manual include: how lawyers can get involved in microenterprise; guidelines on legal formation issues and business issues for microbusinesses; setting up microenterprise programs; information on organizations that support microenterprise and assistance provided by federal agencies.
Todd Arena, Social Corporate Governance and the Problem of Mission Drift in Socially-Oriented Microfinance Institutions, 41 Colum. J.L. & Soc. Probs. 269 (2008).
Abstract (from author):
Microfinance has become increasingly popular as a development and anti-poverty tool due to its promise of providing sustainable social and economic development to the world's poor without the need for ongoing subsidies to sustain such programs. The efforts to achieve this promise have led microfinance providers to focus on what has become an industry-wide push for financial self-sustainability (FSS). However, the efforts to achieve FSS have highlighted a tension between the dual missions of microfinance and created a tendency for the microfinance provider's mission to drift away from an integrated development program towards financial service provision alone. This Article offers a response to mission drift that moves past the traditional stance, which assumes that either FSS or social mission must be prioritized to the expense of the other. By examining the corporate governance aspects of two microfinance providers, particularly through the use of case studies and field research, this Article presents a growing body of experience with governance structures based on a novel conception of corporate governance. Unlike traditional corporate governance mechanisms, social corporate governance is designed to vindicate the organization's social and development goals. This Article argues that social corporate governance mechanisms, when properly balanced against traditional corporate governance structures, alleviate the tension between financial and social development goals and provide a solution to mission drift in microfinance. This Article aims to further the debate within the microfinance community by elaborating the concept of social corporate governance.
C. Steven Bradford, Crowdfunding and the Federal Securities Laws, 2012 Colum. Bus. L. Rev. 1 (2012).
Crowdfunding--the use of the Internet to raise money through small contributions from a large number of investors--could cause a revolution in small-business financing. Through crowdfunding, smaller entrepreneurs, who traditionally have had great difficulty obtaining capital, have access to anyone in the world with a computer, Internet access, and spare cash to invest. Crowdfunding sites such as Kiva, Kickstarter, and IndieGoGo have proliferated, and the amount of money raised through crowdfunding has grown to billions of dollars in just a few years. Crowdfunding poses two issues under federal securities law. First, crowdfunding sometimes involves the sale of securities, triggering the registration requirements of the Securities Act of 1933. Registration is prohibitively expensive for the small offerings that crowdfunding facilitates, and none of the current exemptions from registration fit the crowdfunding model. Second, the web sites that facilitate crowdfunding may be treated as brokers or investment advisers under the ambiguous standards applied by the SEC. This article considers the costs and benefits of crowdfunding and proposes an exemption that would free crowdfunding from the registration requirements, but not the *2 antifraud provisions, of federal securities law.
Edan Burkett, A Crowdfunding Exemption? Online Investment Crowdfunding And U.S. Securities Regulation, 13 Transactions: Tenn. J. Bus. L. 63 (2011).
In recent years, artists, entrepreneurs, and nonprofits (collectively “promoters”) have tapped the collaborative power of the online crowds to fund a wide range of charities, creative projects, and even investment opportunities. This phenomenon is called “crowdfunding,” or sometimes “crowd financing” or “crowd-sourced capital.” This Article first examines the intractable conflict between investment crowdfunding and traditional U.S. securities laws and then explores possible solutions that would enable small companies to more easily raise capital through the online crowds.
Deanna Chea, Note, Microlending: State Regulatory Reforms to Promote Economic and Employment Growth in California, 10 Hastings Bus. L.J. 451 (2014).
Abstract (adapted from author): Microlending has earned a great deal of acclaim for alleviating poverty and facilitating self-sufficiency among entrepreneur recipients of microloans, particularly in developing countries. The microlending structure has been repeatedly replicated and tailored to successfully meet each community’s unique needs. As one of the most socio-economically, geographically, and culturally diverse states in the United States, California can reap the benefits of microlending with careful development of proper infrastructure. This note examines the history of microlending, provides an overview of the current economic state of California, and proposes a number of state legislative and regulatory reforms to create a sustainable and robust microlending framework. In arguing that microlending is an effective potential tool to facilitate optimal economic recovery and growth, post-housing bubble recession, this paper seeks to promote further research and exploration of microlending in the California context.
Rebecca Farrer, Exploring the Human Rights Implications of Microfinance Initiatives, 36 Int'l J. Legal Info. 447 (2008).
Abstract: Microfinance and microcredit (“MFI”) programs have been advanced as a way to make the world a better place. These programs involve making small loans to people who would otherwise be unable to borrow money to facilitate them starting their own businesses: frequently, the programs focus on women borrowers in developing countries. Muhammad Yunus of the Grameen Bank says microfinance and microcredit programs can literally end world poverty.
This article explores MFI from several perspectives, with particular emphasis on human rights issues. The emphasis of MFI programs on women in developing countries makes it important to consider these programs in terms of both women’s and indigenous rights, while MFI as an approach to poverty merits a discussion of economic rights. The Article first explores the concept and scope of MFI programs, identifying key components that the programs share. Particular attention is paid to the Grameen Bank and its much-lauded and prototypical approach. The Article then explores the human rights implications of MFI programs in detail, within the context of economic, indigenous and women’s rights. One particular aspect of Grameen’s program, namely the use of Sixteen Decisions, is also critiqued, applying organizational behavior theory. The Article also examines MFI in respect to other approaches to poverty alleviation in the developing world, including property rights’ initiatives, women’s cooperatives, and social enterprise approaches.
James B. Greenberg, Microfinance, Law, and Development: A Case Study in Mali, 30 Ariz. J. Int’l & Comp. L. 135 (2013).
Abstract (adapted from article): Microfinance is based on a simple, but hardly new idea, that if the poor are given access to savings and credit they are capable of lifting themselves out of poverty. Just as this idea inspired nineteenth-century liberal attempts to deal with poverty, its twentieth-century versions stirs the imagination and led to a vast microfinance movement with millions of clients. This movement, however, is based on some very shaky assumptions: 1) that the poor lack access and want affordable credit; 2) the poor are natural entrepreneurs; and 3) that even small loans can make a difference.
Even if microfinance is not the engine that will lift people out of poverty or the empowering tool that will profoundly change the position of women in the home and society, the small changes it does produce are very real and are greatly appreciated. However, the real story about microfinance is not about whether it delivers on its promises to alleviate poverty as much as whether it is a politically driven game of bait-and-switch. Seen from this perspective, its neoliberal embrace makes sense. Unhappy with development aid, and subsidizing loans to the poor, microfinance offered a seemingly viable, market based alternative that fit the neoliberal vision of development. Still this vision needed to be sold, so claims of its success were if not exaggerated, then based on business metrics rather than social metrics, on amounts loaned and repayment rates, and other numbers rather than on social outcomes. Reinforcing the tale with these metrics, were the doubtlessly true stories of individuals whose lives had been transformed by a small loan. That such results are not typical was certainly less important than the fact that such stories helped raise the money NGOs needed to offer these microfinance programs.
Although it is tempting to make sweeping generalizations, not all NGOs are the same, and the concrete facts on the ground vary as well. On balance, despite the hype, and exaggerated claims, and internal problems with the design and administration, microfinance programs do make a difference, even if it is a more modest one than claimed.
David Groshoff, Kickstarter My Heart: Extraordinary Popular Delusions and the Madness of Crowdfunding Constraints and Bitcoin Bubbles, 5 Wm. & Mary Bus. L. Rev. 489 (2014).
Abstract (by author): This article builds on the author’s existing research program that (a) broadly seeks to analyze laws, regulations, instruments, and policy levers that inhibit a market’s ability to recognize an asset’s intrinsic value, whether in terms of financial, social, or human capital, and (b) explores and advances interdisciplinary corporate governance theories by employing a heterodox economic analytic to derive its proposal to the paradox of an unregulated virtual currency market (Bitcoins) and an overly regulated crowdfunding market (Kickstarter).
To describe the problem, this article (i) describes behavioral finance, (ii) details the new entrepreneurial business possibilities that virtual currencies and crowdfunded entities can explore, (iii) describes how current rules and regulations represent unnecessary constraints to traditional equity-based funding models and concerning governance models of entrepreneurial enterprises, and (iv) questions why one form of capital deployment (currencies) may provide equity-like returns and unique governance, while the other form of investing (crowdfunding), provides only soft-dollar-like returns and no governance for middle- class investors.
While both virtual currencies and crowdfunding represent risks, including economic bubble risk, this article believes that a heterodox economic analysis demonstrates unnecessary constraints on entrepreneurial businesses imposed by extant regulation, regulators, law, and policymakers. To assuage these paradoxic problems for emerging business enterprises, this article proposes a minarchist heterodox solution of modest statutory language that requires market-based solutions that employ needed risk reduction strategies while redeploying necessary capital to private startup business enterprises. This proposal thus benefits the middle class entrepreneurs, suppliers of capital, and job seekers harmed by the current regulatory regime, while permitting for an expansion of the U.S. and global economies.
Joan MacLeod Heminway & Shelden Ryan Hoffman, Proceed at Your Peril: Crowdfunding and The Securities Act of 1933, 78 Tenn. L. Rev. 879 (2011).
(adapted from authors):
This article first analyzes the circumstances under which crowdfunding interests are securities under the definition provided in Section 2(a)(1) of the Securities Act. After situating crowdfunding interests as potential investment contracts governed by the Howey test (or, in the alternative, debt interests governed by the Reves test), this part of the article explains the elements of an investment contract and compares and contrasts them, in pertinent part, to the attributes of crowdfunding interests. This analysis reveals that some crowdfunding interests are likely classifiable as securities. Given that some crowdfunding interests may be securities, the article then focuses on the consequences of that legal conclusion. It describes the regulatory ramifications of security status under the Securities Act's key operative provisions (which require, in significant part, that the offer and sale of a security must be registered or exempt from registration) and the policies underlying both the registration requirement and relevant exemptions. The article explains why the offer and sale of crowdfunding interests under certain conditions should not require registration, and suggests the principles and potential parameters of a new registration exemption for crowdfunding interests, which could be adopted by the SEC under Section 3(b) of the Securities Act.
Lina Jasinskaite, Note, The JOBS Act: Does the Income Cap Really Protect Investors?, 90 Denv. U. L. Rev. Online 81 (2013).
Abstract (adapted from author): The Jumpstart Our Business Startup Act (“JOBS Act”) allows a for-profit business to access equity based financing through crowdfunding. Crowdfunding generally entails small investments into startup companies from a large group of individuals through offerings over the Internet. The provision was designed to “get small businesses and entrepreneurs back into the game by removing costly regulations and making it easier for them to access capital.” This paper first examines the definition of income in the context of accredited investors. Next, it addresses crowdfunding, particularly the investment cap set out in the JOBS Act. The discussion includes the legislative history for the requirement. Finally, the paper analyzes the potential problems with the investment cap as an investor protection mechanism.
David Mashburn, Comment, The Anti-Crowd Pleaser: Fixing the Crowdfund Act’s Hidden Risks and Inadequate Remedies, 63 Emory L.J. 127 (2013).
Abstract (adapted from author’s): A new form of startup financing is poised to turn the world of early-stage financing on its head. The Crowdfund Act—part of the Jumpstart Our Business Startups Act of 2012—will permit middle-class citizens to invest online in startups for the first time. A swelling tide of scholarship, media reports, and security industry publications warns about the risk of fraud inherent in the online selling of equity shares in startups to unsophisticated investors. However, this literature largely omits discussion of the problems with the new civil liability provision included in the Crowdfund Act--an express private action provision that will raise the transaction costs of crowdfunding and ensnare unwary issuers in its liability trap.
This Comment analyzes the hidden transaction costs in the Crowdfund Act, particularly the severe liability cost this provision imposes on issuers. It argues that the new liability provision not only will sweep too broadly—indiscriminately catching negligent entrepreneurs and fraudsters in its swath—but will also fail to provide an effective remedy for defrauded investors. The article concludes that the best solution to both issues is to impose scienter as an element of the civil liability provision while also awarding attorneys’ fees to plaintiffs’ attorneys successful on the merits at trial.
B. Seth McNew, Regulation and Supervision of Microfinance Institutions: A Proposal for a Balanced Approach, 15 L. & Bus. Rev. Am. 287 (2009).
Abstract (from author):
Today, microfinance institutions (MFIs) are providing financial services to millions of the world's most impoverished citizens, who were once deemed “unbankable” by traditional banks due to their lack of credit history and collateral. Although MFIs experienced limited success upon their creation, it is currently estimated that between 1,000 and 2,500 MFIs provide access to financial services for around sixty-eight million clients in over 100 different countries. While great strides have been made in reaching those people who were traditionally ignored by the banking industry, some estimate that MFIs are still reaching fewer than 5 percent of the potential microfinance clients, due, at least in part, to a lack of a formal regulatory framework.
Nikki D. Pope, Crowdfunding Microstartups: It's Time for the Securities and Exchange Commission to Approve a Small Offering Exemption, 13 U. Pa. J. Bus. L. 973 (2011).
As social networking websites and crowd-based problem-solving initiatives gain popularity, entrepreneurs have begun to consider them as possible tools in a fundraising method, known as “crowdfunding.” Current federal and state securities regulations, however, limit the ways in which such fundraising methods can be employed by entrepreneurs and early-stage companies. This article focuses on federal securities rules and regulations and recommends changes the Securities and Exchange Commission (the “Commission”) can implement in federal securities rules and regulations to foster such funding initiatives and facilitate capital formation, while achieving its mission to protect investors from fraudulent investment practices.
Molly Richardson, Increasing Microlending Potential in the United States through a Strategic Approach to Regulatory Reform, 34 J. Corp. L. 923 (2008).
Abstract (from author):
This Article explains microlending in general, and then examines its implementation in the United States. It then analyzes why U.S. MFIs have not reached self-sufficiency at the same levels as international MFIs. Next, this Article examines the various proposals different scholars and practitioners have offered to address the limitations of microcredit in the United States. This Article next recommends the most promising solutions, which center on regulatory reform. The proposed regulatory reforms aim to strengthen the sustainability of microlending in the United States. The Article then offers a practical political strategy to implement these reforms--something largely missing from academic literature on microlending in the United States.
Michelle Scholastica Paul, Bridging the Gap to the Microfinance Promise: A Proposal for a Tax-Exempt Microfinance Hybrid Entity, 42 N.Y.U. J. Int'l L. & Pol. 1383 (2010).
Abstract (from author):
Prior to the emergence of Microfinance Institutions (MFIs), poor borrowers seeking credit without collateral were limited to local moneylenders, who typically charged high interest rates in excess of 100 percent. MFIs now compete with moneylenders, but unfortunately many MFIs also charge very high interest rates. It remains unclear how best to aid MFIs in lowering their rates. MFIs charge higher interest rates than commercial banks because they face higher operating costs. MFI operating costs are comparatively higher than commercial banks because the provision of numerous small loans exposes lenders to greater risk due to lack of information about borrowers, lack of collateral to secure loans, and defaults. Further, MFI operating costs are also pushed upwards due to high administrative costs and the high costs of obtaining capital. Most MFIs are limited in their ability to attract sufficient capital because they are formed as nonprofit entities, which generally are statutorily barred from access to equity capital due to the non-distribution constraint.
Ryan Sanchez, The New Crowdfunding Exemption: Only Time Will Tell, 14 U.C. Davis Bus. L.J. 109 (2013).
Abstract (by author): The new crowdfunding exemption, signed into law by President Obama on April 5, 2012, is Congress’s response to a demand for easier access to capital for small businesses and entrepreneurs. The provision allows for a broader range of potential investors to support projects that otherwise might not have obtained funding under the prior regulations. Before the exemption, limits on the number and type of investors who could take part in an Internet securities offering without having to register largely prevented use of the crowdfunding model. While this exemption may herald the bringing of securities regulations into the twenty-first century, other changes to existing securities laws may ultimately undermine its application. Because the SEC has been late to enact many of the new crowdfunding regulations, only time will tell whether the exemption will be the boost to the economy for which Congress had initially hoped.
Shelley Thompson, Note, 80 Simple Rules: The Effective and Sustainable 2009 Rwandan Microfinance Regulations, 38 Syracuse J. Int'l L. & Com. 415 (2011).
(adapted from author):
This article examines Rwanda as a case study of prudent microfinance regulations. In the wake of a recent near collapse of their microfinance sector, the country has overhauled their regulations to create effective rules for the sustainable growth of microfinance institutions (MFIs) in the country. First this article describes the function of microfinance and why MFIs are an effective tool for alleviating poverty. It then discusses why MFIs benefit from regulation and gives a brief overview of microfinance in Rwanda. The article next examines effective regulation schemes as laid out by the World Bank Group by Consultative Group to Assist the Poor ("CGAP"). Finally, it looks to Rwanda as a case study of a developing nation, which has effectively created microfinance regulations, which follow CGAP's model and serve the needs of the country.
R. H. Tipton III, Note, Microenterprise Through Microfinance and Microlending: the Missing Piece in the Overall Tribal Economic Development Puzzle, 29 Am. Indian L. Rev. 173 (2004).
Abstract (from the introduction): This comment discusses microfinance and microlending in general, providing both foreign and domestic examples of successful MFIs and explaining the different models of microlending. Part III proposes a hybrid model of microlending which is tailored to tribal institutions and is feasible, relatively simple and extremely practical. The final section discusses the positive effect a hybrid model could have on economic development on reservation land.
Megan Whittaker, South Africa's National Credit Act: A Possible Model for the Proper Role of Interest Rate Ceilings for Microfinance, 28 Nw. J. Int'l L. & Bus. 561 (2008).
Abstract (from author): The concept of microcredit, in which poor people are given access to small loans as an alternative to charity, began as an economic and social experiment in the developing world. Microlending was pioneered by Bangladeshi Professor Muhammad Yunus in 1976, when he launched an action research project in his native country to "examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor." As of December 2007, the product that resulted from Yunus' research project, the Grameen Bank, has 7.41 million borrowers, ninety-seven percent of whom are women. The Bank has 2259 branches serving 72,833 villages, covering more than ninety-six percent of the total villages in Bangladesh. The success of the Grameen Bank has been duplicated in various other countries by various other microfinance institutions ("MFIs"). Indeed, loans to the poor have existed for thousands of years, albeit in less formalized models. The movement has advanced from the collective insights of numerous "extraordinary individuals," and today there are thousands of financial institutions around the world providing the very poor with access to financial services. Since the idea's inception in the 1970s, the Grameen Bank and other microfinance institutions have "reversed conventional banking practice by removing the need for collateral and created a banking system based on mutual trust, accountability, participation and creativity."
Van S. Wiltz, Will the Jobs Act Jump-start the Video Game Industry? Crowdfunding Start-up Capital, 16 Tul. J. Tech. & Intell. Prop. 141 (2013).
Abstract (by author): Crowdfunding is a new trend in fundraising whereby start-up companies raise small amounts of money from large networks of people gathered online at the Web sites of intermediaries that facilitate such transactions. In the midst of America’s recovery from a colossal economic crisis, the Jumpstart Our Business Startups Act (JOBS Act) was enacted on April 5, 2012, with bipartisan support. The JOBS Act was designed with certain small business owners in mind and made two fundamental changes, among others, to federal securities laws regarding crowdfunding. Title III of the JOBS Act created section 4(6) (crowdfunding exemption) of the Securities Act of 1933 (Securities Act), which permits the offer for sale, or sale, of unregistered securities exclusively through a new type of intermediary called a “funding portal” (equity-based crowdfunding). Title II of the JOBS Act eliminated the restrictions on general solicitation and advertising in connection with offerings made to accredited investors pursuant to Rule 506(c) of Regulation D under the Securities Act (new Rule 506(c) exemption) and created section 4(b) of the Securities Act; this provides an exemption from registration as a broker-dealer for certain intermediaries that facilitate private offerings made under the new exemption. The crowdfunding exemption and new Rule 506(c) exemption are noteworthy and impact investors, intermediaries, and entrepreneurs involved in the capital markets. This Article narrows its focus and gives an overview of how Titles II and III of the JOBS Act impact the capital markets of the video game industry, specifically.
John S. Wroldsen, The Social Network and the Crowdfund Act: Zuckerberg, Saverin, and Venture Capitalists' Dilution of the Crowd, 15 Vand. J. Ent. & Tech. L. 583 (2013).
Abstract (by author): By virtue of Title III of the JOBS Act, signed into law on April 5, 2012, crowdfunding could become a powerful, even revolutionary, force to finance start-up companies. It democratizes entrepreneurs' access to seed capital and converts the masses of Internet users into potential retail venture capitalists. Many have cautioned, though, that crowdfunding poses serious investment risks of start-up companies failing, committing fraud, and being mismanaged. Accordingly, the JOBS Act includes numerous disclosure obligations designed to mitigate such downside risks. But what has been overlooked, and what this Article analyzes from a venture capitalist perspective, is that even if a crowdfunded start-up company is successful, crowdfunding investors can lose the value of their investment if they lack venture capital legal protections. When successful start-up companies raise additional funds from professional venture capitalists, the value of ground-floor investments can be severely diluted, as colorfully dramatized in The Social Network. In addition, when crowdfunded companies are acquired in private transactions, crowdfunders are at risk of being left out. Therefore, under a “qualitative mandates” regulatory philosophy that moves beyond securities law's status-quo disclosure requirements, this Article proposes substantive venture capitalist protections for crowdfunding investors. For example, down-round anti-dilution protection, tag-along rights, and preemptive rights should help safeguard the value of early-stage crowdfunding investments in successful start-up companies. Especially because many crowdfunding investors are likely to be inexperienced and unsophisticated in start-up-company investing, crowdfunding laws and regulations should go beyond disclosure requirements that warn investors of danger (to the extent investors even read or understand the disclosures) to help crowdfunders obtain market-based economic protections characteristic of venture capitalist investment contracts.
Accion Home Page
FINCA, Microfinance Programs.
Jeffrey Gangemi, Making Microfinance Easier, Bus.Week (Aug. 16, 2006).
Grameen Bank, A Short History of Grameen Bank
Kiva Home Page
MicroPlace Home Page
Prosper Home Page
Jamie M. Zimmerman & Ray Boshara, Global Savings, Assets, & Financial Inclusion: Lessons, Challenges, & Directions: Report From a Global Symposium, June 2007, Singapore (2007).
Bad Dog Pip http://baddogpip.blogspot.com/2006/12/mifex-neighborhoods-tres-trinitaria.html (Dec. 19, 2006, 17:44 EST)
Jenna Wortham, Law Opens Financing Of Start-Ups To Crowds, N.Y. Times, Sept. 23, 2013, at B1.
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