| Informed Funding |
IOSCO statement on the regulation of crowdfunding
On 21 December 2015, the International Organization of Securities Commissions (“IOSCO”) published a on addressing the regulation of crowdfunding (the “Statement”) together with a (the “Report”) on a survey it did on members’ current or proposed investment-based crowdfunding regulatory programs.
The Statement summarises some of the major risks investors face when investing in crowdfunding (rather than more traditional securities products). In addition to common investment risks such as conflict of interest, data protection and fraud, the Report suggests that the following are particularly pertinent to crowdfunding:
- Heightened financial risks: High risk of default or failure is often associated with start-up businesses.
- Fraud, money laundering/terrorist financing: The risk of fraud may be higher in the case of online private offering.
- Platform failure: There is risk of platform failure or closure for crowdfunding portals.
- Illiquidity: In most cases there is no secondary market for crowdfunding securities, which may limit investors’ ability to sell or liquidate these securities.
- Suitability/information asymmetry: A crowdfunding offering may not be suitable for all investors, as many lack experience with these types of offerings and may not be able to carry out sufficient due diligence due to a lack of appropriate skills and/or the significant information asymmetry between the entrepreneur and the investor.
- Cross-border risks: Cross-border risks may arise from crowdfunding operating on online platforms.
The Report shows that the approaches of different jurisdictions and regulators to address the inherent risks related to crowdfunding for the purpose of investor protection are diverse. Measures taken so far by regulators include:
- customising entry, registration, or licensing requirements for funding portals;
- setting disclosure requirements for issuers and funding portals;
- limiting the services that may be provided by crowdfunding platforms;
- requiring investor education and/or statements signed by investors acknowledging their understanding of risks;
- limiting the size of the investments made by an individual in each offering and in a given timeframe;
- requiring the appointment of a third party custodian to hold investor assets; and
- restricting cross-border fundraising by requiring that the issuer or the manager running the funding portal (or both) must be incorporated locally.
The divergent approach taken in different jurisdictions goes to show what a progressive environment we have here in the UK; an environment which will hopefully allow crowdfunding to flourish in coming years.
IOSCO believes it is important for regulators and policy makers to balance the need for supporting economic growth and recovery with that of protecting investors. However, the Report highlights that most regulatory regimes for crowdfunding are still in their infancy and, as a result, IOSCO has decided not to propose a common international approach to the oversight or supervision of these regimes at this stage.
As this new sphere of activity continues to develop, it remains to be seen whether IOSCO will revisit the harmonisation of crowdfunding regulation in the future which will allow ever larger cross-border crowdfundings to occur.
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Jonathan Segal, Partner at Fox Williams LLP
Jonathan is a partner in the FinTech and Alternative Finance team at Fox Williams, a City-based Law Firm. He advises clients across the FinTech and Alternative Finance spectrum, from start-ups disrupting existing markets with innovative technology to financial institutions looking to invest in new technology.
He has particular expertise in peer-to-peer and crowdfunding platforms, drawing on his extensive experience in the banking and finance sector gained both in-house at major financial institutions and in private practice. His experience spans a variety of financial products, including loans (both corporate and consumer), real estate and development finance, asset-based lending, receivables financing, asset finance, trade finance, capital markets, derivatives and repos. A regular speaker at industry events both at home and abroad, Jonathan is also heavily involved in next generation disruptive financial products such as virtual currencies (including Bitcoin), blockchain technology and the use of Big Data in financial predictive analytics and disruptive insurance models.
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