A Survey of Legal and Regulatory Trends
Edited by P. M. Vasudev and Susan Watson
Chapter 6: The two-sided effect of crowdfunding: the visible effect on capital markets regulation and the unperceived effect on company law
Crowdfunding is not new, but it has burst into contemporary economies with extraordinary vigour and exponential growth. Three concurrent factors explain its emergence and increasing popularity today: an economic factor, a social factor, and a technological one. Crowdfunding platforms have started to proliferate and populate the economic scene. Whereas some crowdfunding modalities, such as donation-based or reward-based ones, have peacefully settled in some sectors that eagerly welcomed diversification of financing sources, the purely financial version, namely equity crowdfunding and debt crowdfunding, soon aroused legal concerns and attracted regulators’ attention, as it invades the natural field of regulated markets. Successively, reports, consultation papers and legislative initiatives have been elaborated and adopted in different jurisdictions. All these regulatory initiatives come from observing that funding platforms have entered the capital market scene and joined the ecosystem of financial intermediaries. This is the most visible effect of crowdfunding – the outside effect. Many of the rules adopted so far aim to manage risks, protect investors’ interests, prevent systemic effects, ensure market functioning, and enhance transparency. Notwithstanding, there is a second effect that has largely been unperceived – the inside effect: the effect of crowdfunding on the inside of the company raising capital from the crowd. A crowdfunding-based financing strategy challenges traditional company law rules. Rules governing non-public companies are overall neither well designed nor effective for managing multiple dispersed partners, atomized capital structures and go-public-like demands. Since recent rules on crowdfunding are mainly inspired by capital-market regulatory concerns, dysfunctions amplify. Suddenly, non-public companies embarking on a crowdfunding campaign have to struggle across a challenging, unfamiliar field. These challenges include corporate governance requirements, disclosure duties, complex decision-making, exit strategies when facing illiquidity, finding pure investing partners, public exposure and reputational strategies. This chapter explores the issues and discusses legal strategies to tackle the inside effect. Keywords: • European crowdfunding regulation • Markets in Financial Instruments Directive • Investor protection • Corporate governance • Separation of ownership and control • Disclosure duties
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