Global Capital Markets
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Global Capital Markets

A Survey of Legal and Regulatory Trends

Edited by P. M. Vasudev and Susan Watson

This topical volume examines key developments in the law regulating capital markets, drawing on examples from around the world – including United States, Canada, Europe, China, India, and New Zealand. With perspectives from international scholars, chapters look at current issues including the regulation of crowdfunding, efforts in Europe for shareholder empowerment, hedge fund activism in Canada, international regulatory cooperation, and regulation of corporate governance in China through securities law rules.
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Chapter 6: The two-sided effect of crowdfunding: the visible effect on capital markets regulation and the unperceived effect on company law

Teresa Rodríguez de las Heras Ballell

Abstract

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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