Chapter 16 - Demand-driven crowdfunding regulation

Abstract

This chapter discusses investor, platform, and entrepreneurial views toward crowdfunding regulation. Specifically, this chapter considers the evolution of crowdfunding regulation from the perspective of the race-to-the-bottom/race-to-the-top debate. The empirical setting in this chapter is based on survey data from Canada in 2013(Q1) when equity crowdfunding was not permitted but was openly contemplated by regulators. The data show some tension toward a race to the bottom insofar as start-ups prefer fewer restrictions on their ability to crowdfund, and portals prefer fewer disclosure requirements and fewer restrictions on the free trading of crowdfunded shares. However, this evidence is tempered by the fact that investors demand more disclosure, limits on amounts entrepreneurs can raise, and lower thresholds for audited financial statements, among other things. Based on the ease with which the Internet facilitates cross-jurisdictional investment, we infer from the data that investor demands will give rise to a race to the top in the crowdfunding space. Interestingly, in the Canadian case and after the collection of these data in this chapter, the approved crowdfunding regulations were so strict that no entrepreneurs actually took up the equity crowdfunding exemption to raise capital over the subsequent 5-year period after they were introduced.