- The diversity of securities possibly to be offered on crowdfunding platforms necessitates tailored regulatory interventions to uphold investor protection. Regulators advocate for prescribing disclosure requirements focused on emphasizing the illiquid nature of issued securities; restricting the types of securities that can be issued as well as using targeted product interventions and warnings.
- Introducing enhanced disclosure requirements includes clearly warning potential investors of the possibility that they will be unable to exit their investment at any given point of time.
Country Examples
In Italy, a platform operator must disclose in a brief and easily comprehensible form the risk that it may be impossible to cash in an investment immediately1 , similarly in Dubai.2
1. 6 Resolution no. 18592 of 26 June 2013 (Italy), art. 15.
2. DFSA Rulebook (Dubai), COB 11.3.1, COB/VER36/04-20.
In order to emphasize the illiquidity of securities on crowdfunding platforms, the FCA decided to change the terminology previously used, replacing the phrase “unlisted share and unlisted debt security” with a newly defined term: “non-readily realizable security.”1
1. FCA, FCA’s Regulatory Approach to Crowdfunding over the Internet
- Specifying permissible securities and features safeguards investors from exposure to overly complex or speculative instruments, ensuring crowdfunding offerings align with investors' risk preferences and comprehension levels.
Country Examples
Similar restrictions are found under new EU regulation, where crowdfunding platforms are limited to offering investment only in transferable securities1 -that is, “vanilla” bonds and shares.2
1. Directive 2014/65/EU on markets in financial instruments, 2014, art. 4(1) 44.
2. EU Regulation 2020/1503 of 7 October 2020 on European crowdfunding service providers for business, art. 2(1)a (ii).
In Türkiye interest rate on debt securities cannot exceed 50% of the weighted average of two government bonds with the closest maturity dates to the relevant debt instrument, one of which has a maturity shorter than the relevant debt instrument, and one of which has a maturity longer than the relevant debt instrument. At the same time debt instruments cannot be issued with a maturity of more than 5 years.
- Equipping regulatory authorities with intervention powers enables proactive oversight and intervention in instances where product features or offerings pose undue risks to investors, enhancing market integrity and investor confidence.
Country Examples
In the United Kingdom, a pressing need for regulatory intervention was identified in the context of so called “mini-bonds.” To address risks of harm for retail investors from the promotion of these highly speculative mini-bonds, the FCA introduced temporary product intervention measures1. The FCA was concerned that investors may be attracted to the lucrative returns offered, but that such promotions downplayed the key risks and implied that these products were “safer” than was the case in practice.
1. FCA, “Temporary Intervention.”
