| As an important part of Internet Finance, Crowd-funding shows some of the key spirits of the Internet: open, fair, cooperation and share. Developing Crowd-funding is going to have significant influence on building up a new multilevel financial structure by promoting the inclusive finance system and challenging the traditional finance system, as well on developing entrepreneurial firm by easing their funding pressure and developing the real economy.The development of the society is always prior to the adjustment of the law. Like the famous proverb said: “the law falls behind at the moment it is being practiced”. Crowd-funding is not legalized nowadays in many aspects, such as undefined “security” like funding investment contract which are not recognized by < Securities Act>, due to the lack of specialized laws and regulations and strict definition of “securities” made by decentralized legalization system practiced under the administrative power-oriented guideline. What’s even worse is Crowd-funding seems shares a lot of similarities with some financial crimes, such as illegal deposit taking and issue of stocks and bonds. The risk of committing a criminal offence is like the Sword of Damocles hanging over the heads of all the Crowd-funding practitioners when there is no clear conclusion on whether the funding purpose constitutes a crime, and how to define the information transparency and fairness of the funding progress. This jeopardizes the sound development of Crowd-funding industry while many funding platforms are trying to avoid risk by raising the bar and setting limitations of becoming an investor, and by changing funding forms. There are a series of other problems including risk of financing fraud, protection of shareholder’s equity,capital management, violations of privacy, protection of trade secret, moral issues and etc.According to the analysis above we can ascribe all the legal problems to the information failure among the financiers, investors and the financing platform. In the other words, the information failure between financiers and investors, between platform and investors, between platform and financiers, and between leading investors and following investors leads to all the violations of civil rights and illegal acts. Information failure also provides opportunities to real illegal financing crime. Therefore, it is crucial for this industry to eliminate the information asymmetry, false information and information gap among all the participants in the progress.Internet reputation system, self-regulation of the industry and big data mechanism could solve problems caused by information failure to some extent.Internet era has entitled the reputation mechanism to new way of functioning, after the traditional ways such as repeated games, supervision under acquaintance and unofficial punishments had been majorly changed by the reality that new funding scale went far beyond the limitation of clan, family and territory after the Society of Acquaintances has been replaced by the Society of Strangers. The application of Internet technics engendered the rise of individualities and self-organized groups that makes the mass rational behaviors possible. And the widespread use of social network produced the two key components of the new reputation mechanism: rapid revealing and broadcasting of defaulting information and mass punishment toward defaulters. Other than this mechanism formed spontaneously by individuals, another mechanism which is formed by the third party – the industry itself can also be helpful to solve the problem of information failure and develop this industry. These methods include enforcing the self-regulation of the funding platform, requiring the credibility, providing more both inducement and punishment to the practitioners. Big data technics is also very helpful to solve the information failure from a different perspective. It can produce data and spread data rapidly, search and match information s with strong searching engine, store and process massive information with cloud computing. And based on all of those, it shows more details of the gained information that can’t be revealed in a traditional sample survey, which enables the data to speak the truth for itself.However, the reputation mechanism is not strong enough to handle fully information failure due to the distinct of repeat games, weak punishment toward defaulters and the limitation of mass rationality. Plus crowd-funding activity is new in china so its guild has not gain enough credibility and easy to be captured by the big enterprise, which makes it is still a long way to go down the road. Theoretically big data is the future but there are many problems to be solved, for examples: how to screen massive information and how to match information and how to share information among different entities especially among governments and big cooperation. In a sum, we can’t yet count on internet reputation mechanism, self-regulation and big date to solve all the problems of information failure in crowd-funding industry.Traditionally, besides adjustment by market, the governmental regulation can be used to eliminate the information failure too. So, when the market fails, intervention by the government becomes necessary. It can be underpinned by two points;First of all, the importance of maintaining the security of the financial industry when the incomplete pertinent law and the market failed to regulate it makes it is necessary of government intervention. Meanwhile, government supervision is superior to other methods in many ways, such as reducing searching, spreading and validating cost with its natural advantage of being a strong national organization, and balancing the interests between information senders and receivers by designing policies to protect investors from black case work and fraud. This government intervention can be either conducted by imposing the responsibility of the information sender, providing more information to the investors and encouraging other resource of information, so to improve the information equalization; or by designing array of policies such as calming down period policy, guarantee system policy, and policy on alteration, withdraw and avoidance. Secondly, we can learn from the JOBS Acts in United State and other cases in European countries in terms of crowd –funding legalization.There are defects of our government intervention comparing to international experience of handling information failure:First of all, Crowd-funding is not legalized. There is no pertinent law or regulation which leaves it develops unsupervised and on the edge of financial crime. And that leads in two results: due to lack of back up of law, supervisors are not able to give fine definition of legal funding activity and advice on distinguishing illegal funding activities, so they keep silent when investors are making their investment decision; but after when the defaulting and malignant violation of the investors happens, the law leaves no reasonable buffering zone and punishes strictly. And the validity of the funding activity is based on whether investors could recoup their investment capitals and interests after the funding progress. So the government is acting more as a judge than a supervisor, which actually cut off the functional connection illogically between administrative law and criminal law.Secondly, insufficient supervision including undefined supervising system allows multiple supervisors in one section and zero in some other sections, also leaves no clear definition of the scale and methods of supervision. There are also needs of better coordination between supporting creation and detecting financial fraud, and information sharing during the funding activity.Thirdly, lagging civic credit checking system in a national wide and credit ranking system shows the lack of united credibility system in crowd funding industry.Regarding to the problems above, I believe that the correction of information failure should start from building up the credibility system and supervision system on Crowd-funding.To complete the credibility system, we need to strengthen the credit checking system and ranking system, complete according punish system and intensify the implement and supervision on the punishment of credit fraud. We also need to build up a information platform in a national wide, make effort on more information sharing, especially the information hold by government only, and finally accomplish the big data sharing system under the supervision of government.I think legalization of Crowd-funding is the first thing to do, in another word, make the most convenience for the investors under protections is our first priority. Based on this legalization we could go further to explore more solutions for correcting information failure. There are simply two ways to correct information failure: provide more useful information and reduce the demands for information. The most effective way to provide more information is to force the funding side to reveal more information, but this traditional approach is facing a series of problems with crowd-funding background. As to the platforms, efforts like rising the industry admission bar, enforcing the review system, and entitling them the right of supervision should be made. And for investors, we can more try to reduce the demands for information such as educate them with the risk of investing activities and design more policy to spread investing risk.So in the dissertation I analyzed this issue with two parts. First part is about the legalization of Crowd-funding which can be conducted with 3 steps: first step is to clarify the difference between crowd-funding and illegal funding; the second step is to bring Crowd-funding into Security Act; thirdly, to set up the exemption policy on issuing small amount Crowd-funding. After clarifying the goal and methods of the legalization progress, I will discuss the supervision system from the perspectives from the funding-side, the platform and the investors.First, supervise the financing side. Crowding funding is a high risk direct-funding activity with a huge possibility of information failure because its information source is the internet which allows the virtual information can be spread rapidly and systemically. That is why the information sharing should be mandatory. But high cost of mandatory information sharing did not result in the efficient protection of the investors, plus there is a conflict between sharing information and protecting trade secret and privacy. So both the financing side and investors are tend to just looking for information in its own way. We can learn from the JOBS ACT enforced in United States which adopt the methods of sharing information in different levels. It requires the financing side to share information to different levels according 6to different financing amount. Some key information are mandatory to all investors. Divide investors into different groups, so investors who are more capable of high-risk investment would be considered to take responsibility of their investment, and mass investors who are not able to identify high-risk investment could invest with a capital limit. In terms of information sharing and protection of trade secret and privacy, we could apply for patent for the trade secret and make a clear definition of privacy protection and information sharing.The second thing is to complete the supervision system. It should be done in 2 parts with 3 aspects: first part is to design the path to legalize Crowd-funding so to fulfill the goal of make the most convenience of the investors under protections; the second part is to design related policy according to the 3 main aspects. That includes: 1, enforce the supervision on the financing side. Learned from JOBS ACT, we should emphasize the information sharing about the financing side, and solve the conflict between sharing information that might generates higher cost and protecting the trade secrets; 2, enforce supervision on platforms. We should clarify the supervisors and regulations, raising the bar of becoming a legal platform so they can manage the business professionally and perform their responsibility of doing due diligence and investor’s education; 3, protect the investors, we can divide the organization investors and common mass investors so we can design policies scientifically such as “cooling-off period” system,escrow system, trusteeship management and alternative dispute resolution system. So, this chapter offers the final solution.Thirdly, to protect the investors, the key mission is to solve the conflict between facilitating the funding and protecting the investors. With the rapid growth of Internet finance, the rise of Crowd-funding is inevitable. Known as the innovator, U.S. has issued the JOBS ACT to facilitate Crowd-funding. There is no reason for China in which the finance market has been restrained for years under the guideline of investors’ safety is first priority to stand still refuse to make progress. The first problem we should solve to legalize the Crowd-funding. It can be done in 3 steps: 1, clarify the difference between crowd-funding and illegal funding; 2, bring Crowd-funding into Security Act;3, set up the exemption policy on issuing small amount Crowd-funding.We also need to design a series of policy to protect investors on the basis of the legalization progress. These policies should covers 3 aspects: 1, Design the policy of exemption on issuing the small amount Crowd-funding. With this policy, any fund of capital under 5 millions could avoid to be reviewed by the supervisors `and fund capital more than 5 millions should under supervision; 2, Divide investors into different groups. For organization investors and other qualified investors, it should be clear that the responsibility is going to be undertaken by themselves, and for common mass investors, there should be limit on investment at one time and a limit on total investment based on the investors’ annual income or net asset. This way it can both meet the needs of different investors and make the investment risk under control; 3, Complete the “cooling-off period” system,escrow system, trusteeship management and alternative dispute resolution system.There are six chapters in this dissertation:Chapter one states the basic theory of Crowd-funding. There are some key words for describing Crowd-funding: “internet platform”, “mass”, “micro”, “one-to-many”. I compared it with other similar concept such as “P2P”, “IPO”, “DPO”,“PE/VC”,“Private equity” to define Crowd-funding and the major types and clarify the legal relationship among financing side, platform and investors.In terms of major types, there are donation funding, return-in-kind funding, credit funding and stock funding. Donation funding is gratuitous and return-in-kind funding is actually a purchase in advance, so these two types of funding are not going to be discussed here because they do not have characters like other crowd-funding. So here we only discuss credit funding and stock funding.There is no official stock funding platform yet in China because it is not legalized yet. Local crowd-funding platform like Dajiatou.com and angelcrunch.com have done many experiments, for examples: Dajiatou has created some innovative policy such as risk compensation policy and leading investor policy; Anglecrunch provided the business help and offline matching for the financing side and etc. But there is substantially difference with international funding platform such as “fundersclub”, because fundersclub can issue stock directly to investors, but local platforms have to set up the limited partnership to circumvent the risk of issuing public stock. This showcases directly that U.S. support crowd-funding industry with its legal system. Accordingly, the legal relationship among related sides varies with the funding type.Credit funding has many types including agent funding like ‘’prosper”, guarantee funding like “renrendai”, and self-support credit funding like “creditease”. The legal relationship among related sides varies with the funding type.In the second part, I explained the importance of bring the competition to the industry so it can form “carp effect” in traditional finance system which will build up multiple layers of the financing to solve the financing problems for small companies and the real economy. This is the logic starting point of my dissertation.Chapter 2 analyzed the major legal risks and its cause in Crowd-funding.First of all, I analyzed the potential criminal legal risks including illegal absorption of public funds, issuance of stocks and securities without approval and fraud in financing. Considering the similarities on the criminal elements, credit funding is more similar to illegal absorption of public funds, and stock funding is more similar to issuance of stocks and securities without approval. Theorists are tend to agree that the key point of defining illegal absorption of public funds is the purpose of funding. So it should not be defined as crime if the money it raised be used for production. Even it is considered as a crime, it should apply to the issuance of securities without approval. Also, there are arguments about the calculation of “200 investors” and definition of the openness. But generally, there is huge risk like sword of Damocles hanging over this industry within current law system, which explains why local funding platform has to declared that they sell only the project provided by the financing side but not raising a fund.Secondly, there are also plenty of civic legal risks refer to financial fraud, over-valuation on the funding project, safety of the capital, management of the funding capital,and how to protect the investors’ right including managing right, 9equity right, supervising right, and share transferring right as shareholders and how to protect trade secret and privacy of individuals.The third part of this chapter will analyze all the legal risks based on the problems mentioned above with information failure theory, and come up with the conclusion: the root of all these legal risks is the information failure among all the participants of funding activity, so solving information failure is crucial to standardize Crowd-funding industry. Chapter 3 is a chapter of bringing up questions.Now we are clear that the main problem is information failure, and the solution is simply rely on the self-regulation of the market and government intervention. So in Chapter 4, Chapter 5, Chapter 6, I will analyze advantage and disadvantage of both the market and government toward correction on information failure.Chapter 3 analyzed the advantage and disadvantage of correction on information failure. There are 3 main ways: internet reputation mechanism, self-regulation system, and big data system.Internet reputation mechanism is the new form of traditional reputation mechanism which works with repeat game, acquaintance supervision and unofficial mass punishment. In internet age, loaning is no longer a repeat game but a one-time trade, the investors are no longer acquaintance but strangers from different family, clan and area. So mass punishment are not effective anymore. But mechanism stayed the same. Analyzing the application of Kabbage pattern in the ranking system employed by taobao.com, chapter 3 argued that with the mass rational activity and the use of social network, two key elements of forming the new reputation mechanism are able to be generated: rapid default information spread and mass punishment. But there is limitation as uncertainty of the mass rational activity and mass punishment.In the industrial self-regulation party, based on the analysis on taobao business alliance,one of the innovative self-regulation organization, I illustrated the possibility of create a organization to replace the acquaintance community in the traditional society when mass punishment can’t be conducted efficiently. The organization can not only function as the information agent, but also collect and pass around the default information and act as the judge to verdict the dispute and punish the defaulters. So it is important to strengthen the self-regulation of the platform, elevate the credibility of the guild and implement the punishment. But just like guilds in other industries, Crowd-funding guild is not authentic and capable enough, so it is easy to yield to big cooperation.The application of big data provides a new method to solve the information failure. Thanks to the rapid development of internet technics, massive of information can be spread faster without the limitation of distance; rapid development of search engine and cloud computing makes information more accurate and thorough; the development of internet community added more channels of acquiring information. Supported by information technics, search engine, cloud computing and internet community, the application of big data makes the information transfer more intellectual and systematic. Big data is able to correct the information failure to a extent. But under current social situation and technics, there are many problems to be solved, for example: how to screen the useful information in massive information flow, how to match the information, how to break the information isolated island, how to share the information hold by certain companies or government. It takes time to utilize the big data to correct information failure before the social credibility system fully built up.Chapter 4 introduced some experience we can learn to correct information failure. There are two parts:First I introduced the general theory and main ways to correct the information failure. The reason why government regulation is necessary is it has some inherent advantages includes the compelling force to balance the both of financing, the authority to save time and cost of information searching and spread and the possibility of policy innovation to correct the information failure.There are two main ways: one is to reallocate the responsibility such as assigning more responsibility of sharing information to the prevailing party and provide more information about quality certification and trade mark, meanwhile, the government should punish the defaulters; the other one is to design new policies to make sure the information sharing evenly, such as calming down period policy, guarantee system policy, and policy on alteration, withdraw and avoidance.This chapter also gave a detailed introduction of supervision system in developed western countries and areas, especially of JOBS ACT and main system and perspective about credit funding in U.S., and of the related policy in U.K., France, Italy, and Australia. Analyzing their legalization background, supervision perspective and policy, we can learn form it.Chapter 5 states the deficiencies of government management of information failure on Crowd-funding. For instance: The lack of related law, the limit of development space for new funding pattern, uncertainty of supervisor and unclear definition of funding platform. So, Chapter 3, 4, 5 are the analyzing part of this dissertation.Chapter 6 brought up the solutions of correcting information in Crowd-funding.The first thing should be done is to complete the credibility system. I propose to strengthen a united credibility system by the government. This system should complete the credit investigation system, credit ranking system, and punishment system, should build up a platform for sharing the credit information and set a standard for it. I believe that a effective credibility system is the infrastructure of correcting information failure, also I demonstrate the possibility of the application of big data under a fully-functioned credibility system run by our government.The second thing is to complete the supervision system. It should be done in 3 parts: first part is the supervision on the financing side. Learned from JOBS ACT, we should emphasize the information sharing about the financing side, and solve the conflict between sharing information that might generates higher cost and protecting the trade secrets. Second part is the supervision on platforms. We should clarify the supervisors and regulations, raising the bar of becoming a legal platform so they can manage the business professionally and perform their responsibility of doing due diligence and investor’s education. The third part is to protect the investors. We should legalize the Crowd-funding by bringing it to the Security Act, and divide the organization investors and common mass investors so we can design policies scientifically such as “cooling-off period” system, escrow system, trusteeship management and alternative dispute resolution system. So, this chapter offers the final solution. |
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