Substack Shows Community Ownership Doesn’t Need Web3 Or Tokens

As the world waits to see if Web3 is more than just a marketing term to pump the blockchain hype cycle, companies like Substack are already pushing the boundaries of community ownership and user empowerment models.

Since Substack isn’t launching a cryptocurrency or token, some may question how the publishing platform’s recent crowdfunding campaign relates to Web3. The answer is that Substack is approaching user ownership on democratic principles that blockchain advocates aggressively claim for Web3. Yet Substack is able to do this without involving any blockchain or crypto token, which suggests that the ‘future of Web3’ may simply be the here-and-now of fintech and the internet in 2023.

Substack Offers Ownership To Writers

The newsletter platform Substack is now allowing writers to invest in the company. This is the latest in a series of measures Substack has taken to prioritize the rights of contributors, according to a letter CEO Chris Best sent to writers on March 28:

“We’re doing this because the dynamics of a platform like Substack change if the people who are building their businesses on it are owners of it too.”

The loyalty impact of equity ownership is real. Weekly spending by users that were awarded small equity grants in specific brands rose by 40% and stayed persistently high months later, according to a 2021 study by the National Bureau of Economic Research.

Substack is using WeFunder to manage the raise under regulation crowdfunding rules, also known as Reg CF. This lets anyone invest as little as $100 and up to $2,500 annually in early stage ventures using anything from a check to Apple Pay. Both US and non-US citizens can participate, and the annual limit can go as high as 10% of one’s reported net worth.

Regulation Crowdfunding

Reg CF was introduced in the 2012 JOBS Act but had a slow start, due in part to the limited amounts companies could raise relative to the costs of compliance. Companies like WeFunder now make it easier to list, and the investing limit rose to $5 million per year in 2021. That had a big impact. Funds raised through Reg CF from 2012 through 2020 totaled $500 million, but that figure doubled in 2021 and added roughly the same amount in 2022, according to Crowdfund Capital Advisors.

Growth notwithstanding, crowdfunding draws some concerns. Here are three:

1. Even the elevated limit of $5 million is still much less than many startups need to raise. However, a small crowdfunding allotment to benefit users inside a larger investment round is a viable strategy, as Mercury Bank showed in 2021.
2. Companies raising money through Reg CF have fewer reporting requirements, meaning that crowdfunding investors may have less information to base their choices on than venture capitalists usually enjoy. That said, capped investment limits and other Reg CF guardrails help balance risks without saddling startups with onerous reporting and voting requirements.
3. Dropping hundreds or thousands of user-owners into a company’s cap table can make a real mess and deter investors in later funding rounds. However, there are now ways to avoid that clutter, including the use of special purpose vehicles and the co-op model described below.

Crowdfunding may be the shiniest example of offering user-ownership to just about anyone – outside minting a crypto token and hoping the Securities and Exchange Commission doesn’t come knocking – but it may overshadow a host of relatively mundane ways to include users in the upside of a business.

Co-op 2.0

Another alternative, which Substack isn’t currently taking, is the co-op model. The co-op may be the ‘1950s musical’ of ownership and business regulation. It’s old-school. You might have encountered a co-op if you ever had an account at a credit union. But this legal form of pooling resources has some properties that, if rebooted, could make Web3 seem outmoded by comparison.

A cooperative is a legal entity that gives its owners rights to both governance and retained earnings while limiting liability. And notably for the Web3 world, co-ops historically have not been classified by the SEC as securities, according to a January paper issued by the law firm, Orrick and Big 4 accounting firm, KPMG.

While not typically suitable for initial capital raising, co-ops are a well-established method for turning users and contributors into members that not only have voting power, like some Web3 ‘governance tokens’ claim, but also can legally receive ownership rights and pro-rata claims on retained earnings.

Given these advantages, organizations that aim to follow Substack’s example and empower user-ownership — even new Web3 protocols — might soon opt for the co-op model, if new fintechs like WeFunder were to make it automatic and straightforward.

Fintech Is Already Democratizing Ownership

Democratized user ownership is a powerful force that can reshape the digital landscape. Fintechs like WeFunder that comply with investor protection laws may take more work than simply minting a crypto token, but as Substack is showing, we don’t need to wait for Web3 to give users skin in the game.