Regulatory Arbitrage in Cross Border Crowdfunding

Abstract

In the aftermath of the 2008 financial crisis, small businesses found it increasingly difficult to raise funds. Equity crowdfunding has emerged as a viable alternative for sourcing capital to support innovative, entrepreneurial ventures. Equity crowdfunding merges the complexity of public funding, with the systemic risks of venture capital funding. A key responsibility of any securities regulator is that of investor protection. Securities laws, involving stringent eligibility criteria for fundraising companies and detailed disclosure requirements have been instrumental in mitigating risks for public retail investors to some extent. A number of securities regulators across the world have dealt with, or are in the process of dealing with equity crowdfunding as a disruptive innovation to established processes of corporate fundraising. However, most equity crowdfunding regulations do not take into account one critical aspect of crowdfunding - that of cross-border crowdfunding. I argue that in jurisdictions where crowdfunding activities are unregulated or have a low threshold of regulations, the opportunities arising from the resultant regulatory arbitrage could then be used by fund-seeking companies based in jurisdictions where crowdfunding is prohibited or highly regulated. As a result, securities regulators must work together to derive minimum standards of acceptable behavior in cross-border crowdfunding markets. This is a draft of a chapter that has been accepted for publication by Oxford University Press in the Oxford Handbook of IPOs edited by Douglas Cummings and Sofia Johan published in 2018. An earlier version of this paper was drafted as part of a visiting research fellowship at the Melbourne Law School. The author is grateful to Mr Lakshay Garg, BBALLB Class of 2013, Jindal Global Law School for his research assistance.