- Mandating platforms and issuers to provide clear, concise risk warnings and disclosures will ensure that investors comprehend the inherent risks associated with crowdfunding investments, enabling them to make informed decisions.
Country Examples
EU regulation on crowdfunding1 requires that a range of information, including marketing communications from platforms operators to clients or potential clients, is fair, clear, and not misleading and is available to all clients and potential clients in a nondiscriminatory manner on a clearly identified section of the website of the crowdfunding platform.
1. EU Regulation 2020/1503 of 7 October 2020 on European crowdfunding service providers for business, art. 19.
- Introducing caps on the size of crowdfunding issues and individual investment amounts mitigates the potential for disproportionate losses, safeguarding investors from overexposure to risk. A range of jurisdictions have implemented such caps.
Country Examples
In the United States, the crowdfunding regulations permit an issuer to raise a maximum aggregate amount of USD5 million over a 12-month period1 (raised recently fron an original limit of USD 1.07 million). In EU the threshold is similar and set at EUR 5 million (USD 5,6 million) over twelve months throughout the European Union. In Brazil the threshold is set at R$5 million2 (USD 900,000), and in Japan the threshold is ¥100 million3 (USD 700,000).
1. Regulation Crowdfunding, General Rules and Regulations 17 CFR (USA), Rule 230.501.
2. Brazilian Securities and Exchange Commission Instruction No. 588 of July 13, 2017 (ICVM 588/2017).
3. Morita, “Crowdfunding in Japan.”
- To limit exposure of inexperienced investors to risky crowdfunding investments, some regulators are introducing limits on how much they can invest. There are generally two main approaches to setting investment limits: imposing a fixed monetary amount or requiring the cap to be calculated by reference to a prospective investor’s circumstances, such as their income or assets.
Country Examples
The UK rules on direct financial promotions1 allow platforms to communicate financial promotions directly only to retail investors that confirm that they will not invest in investment-based crowdfunding more than 10 percent of their net investable assets in investments sold via investment-based crowdfunding platforms unless receiving regulated financial advice.
1. FCA Conduct of Business Sourcebook—July 2019 (UK), 4.7
On the other hand, countries such as Malaysia have set a cap based in absolute amounts. The investment limit for retail investors has been set to a maximum of RM 5,000 (USD 1,200) per issuer, and the total amount to be invested is limited to RM 50,000 (USD 12,000) over 12 months1.
1. Guidelines on Recognized Markets, Rule 13.24.
In Türkiye there is a combined approach, a maximum of TRY 50,000 (USD 1,300) or 10% of annual income in a year for equity provided that the investment does not exceed TRY 200,000 (USD 5,200) and a maximum of TRY 20,000 into a single project through debt (USD 520). Qualified investors are exempt from the above limitations for crowdfunding investments.
- Requiring platform operators to conduct thorough investor appropriateness or suitability assessments ensures investors possess the requisite knowledge, experience, and financial capacity to engage in crowdfunding, minimizing the likelihood of inappropriate investments. Common techniques employed include running an entry knowledge test or simulations to gauge ability to bear losses. Some jurisdictions have mandated both investor tests and loss simulation for prospective investors. New EU regulation requires not only an entry knowledge test for prospective investors1 but also that operators require prospective investors to simulate their ability to bear loss2.
- Implementing cooling-off periods affords investors a window of opportunity to reconsider their investment decisions without penalty, promoting rational decision-making and reducing the incidence of impulsive investments. While many regulators seem to agree on the value of a cooling-off period, there seems to be no common approach on the time frame within which such a right should be allowed to be exercised. In Italy, the cooling-off period starts on the day an investor subscribes to the offer and lasts seven days3. In Australia, the cooling-off period lasts up to five days after subscribing to the offer (making an application),4 while in Malaysia, it is six days5.
1. EU Regulation 2020/1503 of 7 October 2020 on European crowdfunding service providers for business, art. 21 (2).
2. EU Regulation 2020/1503 of 7 October 2020 on European crowdfunding service providers for business, art. 21 (2).
3. Resolution no. 18592 of 26 June 2013 (Italy).
4. Corporations Amendment (Crowd-sourced Funding) Act 2017 (Australia), s. 738ZD and ASIC, Crowd-Sourced Funding: Guide for Companies (Regulatory Guide 261), June 2020, 261.83.
5. Guidelines on Recognized Markets SC-GL/6-2015(R3-2019) (Malaysia), Rule 13.08.
