The proliferation of investment-based crowdfunding has prompted regulatory scrutiny and intervention to mitigate potential risks and safeguard investor interests. Regulatory frameworks vary across jurisdictions but often involve tailoring existing capital markets regulation to specific crowdfunding risks (see chapter IV ) and providing carve outs or exemptions necessary to facilitate crowdfunding activity. These regulatory frameworks aim to streamline compliance requirements for SMEs, reducing administrative burdens and costs associated with traditional fundraising methods while balancing it with investor protection.
When examining regulatory strategies concerning crowdfunding, it's essential to delineate between two primary types of activities or services within the crowdfunding realm. The first involves the issuance and promotion of securities to retail investors, commonly referred to as the crowd through a platform. In many cases this is the only allowed activity of a crowdfunding platform. The second encompasses the provision of trading platform services for crowdfunded securities and the potential risks associated with such operations, however this is still not widely practiced or allowed.
Crowdfunding operations typically enjoy exemptions from conventional capital market regulations. However, specific restrictions and thresholds are imposed on issuers, platform operators, and investors to balance these exemptions. Without these modifications to traditional capital market rules a crowdfunding platform seeking to provide investment services or an SME seeking to issue securities would generally need to meet regulatory criteria tailored for typical capital markets players, which can be arduous and costly and may impede the advancement of investment-based crowdfunding platforms.
The growing recognition of investment-based crowdfunding's potential to enhance small businesses' access to finance has prompted regulators worldwide to reassess their frameworks, aiming to streamline crowdfunding processes while safeguarding investor interests.
Country Examples
For instance, the U.S. Securities and Exchange Commission (SEC) , in formulating crowdfunding regulations, underscored the intent of the JOBS Act1's crowdfunding provisions to facilitate capital provision for startups and small businesses through modest securities offerings, featuring relatively low investments from the general public at reduced costs2.
1. Title III of the JOBS Act added Securities Act s. 4(a)(6), which provides an exemption from registration for certain crowdfunding transactions. To qualify for the exemption under s. 4(a)(6), transactions must meet a number of statutory requirements, including limits on the amount an issuer may raise, limits on the amount an individual may invest, and a requirement that the transactions be conducted through an intermediary that is registered as either a broker-dealer or a “funding portal.”
2. SEC. “Final Rule: Crowdfunding”, p.6 (USA), Supplementary Information (USA), 6.
Similarly, the Australian Securities and Investments Commission (ASIC) indicated that amendments introduced by the 2017 Corporations Amendment Act aimed to establish a legislative framework conducive to flexible and cost-effective capital access for small to medium-sized unlisted public and private companies. This was achieved by reducing regulatory burdens associated with public share offerings while ensuring adequate protections for retail investors1.
1. Explanatory Memoranda, A Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth) (Australia).
Likewise, the European Commission recognized the need for a specialized regulation for European crowdfunding service providers, citing concerns that existing capital market rules within the European Union may be disproportionate for small-scale activities and inadequately tailored for their intended purpose1.Same reasons led regulators in EMDEs to embark on creating a regulatory framework for crowdfunding, including Türkiye, Indonesia, Malaysia, Brazil, Nigeria and so on.
1. Proposal for amending EU Directive 2014/65/EU on markets in financial instruments 2018.
