- Regulators should aim to mitigate information disparities and tackle abuses related to information and marketing through diverse disclosure, information integrity, and marketing standards. Regulatory efforts targeting these risks associated with crowdfunding encompass mandates for investment-related disclosures, oversight of bulletin boards and crowdfunding trading platforms as well as enforcement of equitable marketing guidelines.
Minimum disclosure standards that mandate the disclosure of both general issuer information and specifics about individual offers will help mitigate information asymmetry and aid investors in making prudent and well-informed choices. These typically include key characteristics of the issuer, a description of the issuer’s ownership and capital structure, financial information about the issuer with or without an independent audit requirement, the main risks facing the issuer’s business, the purpose of the fundraising and the targeted offer total, information about the issuer’s business plan and a description of the securities being issued and the investor’s rights linked to them. More+
Requirements are also placed on platform operators to source and provide relevant information. For example, in Italy, a platform operator must make available to investors, in a detailed manner and without omissions, all information about the offer provided by the issuer so that investors can understand the nature of the investment.1Some regimes also impose standardized format requirements to assist investor comprehension.
- Regulators have recognized the potential for abuses that may occur through bulletin boards and trading platforms if these are not already regulated under existing capital markets rules (for example, MiFID-regulated intermediaries in the European Union or broker dealers in the United States). Therefore, in parallel to encouraging the development, regulators are developing standards aimed at reducing such information-related and market-abuse risks.
Country Examples
In Dubai, if an operator provides a means of communication (a “forum”) for users to discuss funding proposals made using the service, the operator must refer investors to the forum as a place where they can discuss proposals, while clearly stating that the operator does not conduct due diligence on information on the forum.1
1. DFSA Rulebook (Dubai), COB 11.3.15.
- Consumers investing on crowdfunding platforms may also suffer losses due to issuer fraud in a range of scenarios. Issuers (which may be genuine or sham issuers) may attempt to defraud potential investors by showcasing fraudulent business plans, by concealing facts about their history or their management, or by using misleading promotion techniques. It can be difficult for an unsophisticated investor to detect a sham offering and perhaps even more so, fraudulent aspects of an otherwise seemingly genuine offering. This is amplified by the fact that, unlike with traditional public offers, the regulator’s role in reviewing the offer-related information is minimal or nonexistent. A common approach taken by regulators is placing the onus on platform operators to conduct due diligence on issuers and their offerings, although the minimum required level of due diligence varies significantly in different jurisdictions. This can range from platforms being requested simply to satisfy themselves that a fraud is highly unlikely in a particular case (for example in the US) to expecting platform operators to examine the soundness of issuers’ business plans (Malaysia) or establishing specialize investment boards to review business proposals and provide credit ratings (Türkiye).
- Advertising and marketing more generally play an important role in crowdfunding. Regulators are trying to ensure that issuers, platform operators, and other promoters give clear, accurate, and balanced messages when advertising crowdfunding offers. Some regulators restrict advertising outside of platforms (US2, Dubai3 ).
Country Examples
According to new EU regulation on crowdfunding, platform operators have to ensure that all marketing communications to investors are clearly identifiable as such.1
1. EU Regulation 2020/1503 of 7 October 2020 on European crowdfunding service providers for business, art. 27(1).
- In addition to the typical investor protection measures discussed above, by facilitating information exchange between investors and in some cases secondary trading regulators help to reduce some of these risks. Facilitating information exchange mechanisms and secondary trading platforms enhances market liquidity and transparency, fostering investor participation and market efficiency while curbing information asymmetry. In order to improve access to information about securities and support creation of secondary markets, platform operators started introducing online bulletin boards to encourage information exchanges between investors. Such practices are currently more prevalent in the United States and United Kingdom, but regulators are increasingly developing regulatory frameworks to incentivize such development (for example, in Dubai, Australia, Malaysia, and Brazil). Regulations in Dubai and Malaysia go a step further than those in the European Union, the United States, or Australia and allow platform operators to run secondary markets in addition to providing forums for information exchange.
1. Resolution no. 18592 of 26 June 2013 (as amended).
2. Regulation crowdfunding, General Rules and Regulations 17 CFR, (USA), Rule 227.402(a), Rule 227.204.
3. DFSA Rulebook (Dubai), COB 3.2.4.
