The U.S. investment crowdfunding market is quietly facing a crisis.

A troubling number of startups have raised capital from everyday investors under Regulation Crowdfunding (Reg CF)—and then disappeared, ghosting the crowd by failing to file the annual reports required by law. No updates, no financials, no accountability. Just silence.

These reports are not optional. They are a legal obligation, and more than that, they are a core promise embedded in the design of the crowdfunding regime: In exchange for the privilege of tapping public capital, issuers must provide at least one annual update to their investors. Yet in a new article, I report that a majority of issuers never file even a single follow-up report. They take the money—and vanish.

This is more than a technical violation—it is a systemic threat to the integrity and legitimacy of investment crowdfunding.

How We Got Here

In the JOBS Act of 2012, Congress sought to democratize startup finance by authorizing investment crowdfunding and directing the SEC to implement the necessary regulations—eventually codified as Reg CF. The idea was simple: Allow small companies to raise modest amounts of capital from retail investors, provided they play by a basic set of rules. Chief among them was a requirement to file an annual report (Form C-AR) within 120 days of each fiscal-year end.

But in practice, this foundational promise is routinely broken. Many issuers ghost their investors without consequence, even when they are still operating. Some may misunderstand their obligations. Others may simply calculate, correctly, that the SEC will not enforce the rules. Platforms rarely step in. And reputational consequences—long touted (including by me) as a self-enforcing mechanism—have proven illusory in this fragmented, opaque corner of the capital markets.

The result is a growing pool of public investors with no information about what became of their money. It erodes investor confidence, diminishes the prospects for secondary markets, and jeopardizes the future of crowdfunding as a legitimate investment channel.

A Simple, Market-Compatible Solution

To address this quiet crisis, I propose a modest but powerful reform: Require platforms to withhold 1 percent of the funds raised or $1,000, whichever is greater, and release it to the issuer only upon timely filing of their first annual report.

This approach is pragmatic. Escrow mechanisms are already common in real estate, M&A, and venture deals. A small holdback creates a clear financial incentive without placing a significant burden on issuers. It is a behavioral nudge, not a hammer.

The logic is straightforward: If you want access to public capital, you must fulfill your public disclosure obligations. And if you don’t, you don’t get paid in full.

Importantly, this proposal does not require the SEC to create a new enforcement bureaucracy. It builds on the gatekeeping role that crowdfunding platforms already play. With minimal implementation costs, the SEC could adopt this reform as a simple amendment to Regulation CF.

Why the SEC Must Act

In theory, platforms could voluntarily impose such conditions. In reality, they won’t. The crowdfunding market is highly competitive, and platforms fear losing business if they impose even the lightest of compliance obligations. This is a textbook case of market failure—one that only regulatory action can correct.

Fortunately, the SEC has the authority. The JOBS Act grants the Commission broad discretion to issue rules “as the Commission determines may be necessary or appropriate for the protection of investors.” A 1 percent escrow—or some other modest amount—fits squarely within that mandate.

My article includes model regulatory language that the Commission could adopt—or adapt—immediately. The fix is clean, cost-effective, and ready to go.

Rebuilding Trust, 1 Percent at a Time

Investment crowdfunding is one of the boldest experiments in financial democratization in recent memory. But its long-term success depends on transparency, credibility, and compliance. If issuers can raise public funds and then simply disappear—without updates, oversight, or consequences—then the market will collapse into irrelevance or abuse.

The solution is not sweeping new legislation or heavy-handed regulation. It is a small, smart design tweak: Withhold a sliver of proceeds until the company demonstrates it has fulfilled this basic legal duty.

Just 1 percent. That’s all it takes to restore a measure of accountability—and to keep the crowd from being ghosted again.

This post comes to us from Andrew A. Schwartz, the DeMuth Chair of Business Law at the University of Colorado Law School. It is based on his recent article, “Ghosting the Crowd,” published in the Washington and Lee Law Review and available here.