Research On The Legal Supervision Of The Equity-based Crowdfunding

Equity-based Crowdfunding, as an Internet Financial Innovation, resulted from the large financing requirements and the emerging of dozens of rich general investors. Equity-based Crowdfunding could relieve most startups’ financing difficulties which have existed in China for a long time. The financing difficulties, which come from Financial Repression, include the cumbersome loan process, lots of Terms of Loan, the low success rate of applying for Third-Party Credit Guaranty and the high cost of guaranty. While Equity-based Crowdfunding has a simple loan process and gives little limitation or guarantee requirement for the issuers, so that it could improve access to the public capital markets and is good at relieving the financing difficulties. For instance, generally, a success campaign issuer need to pay for about 2% to 5% of the total offering amount to the Equity-based Crowdfunding Platform in China, and the cost is much lower than the traditional financing channels, and what’s more. Besides, Equity-based Crowdfunding could be a way to promote or sale, could realize the democratization of the capital markets and the Financial Consumers’ Participation Right, could contribute to construct the Multi-level Capital Market, and could increase the job creation and economic growth. Therefore, the China Securities Regulatory Commission changed its strict supervision attitude to financial innovations, and did not prohibit or limit the existence of Equity-based Crowdfunding, but keep waiting and observing. And the central government is encouraging and accepting the Equity-based Crowdfunding.During the campaign of Equity-based Crowdfunding, there are a great deal of risks, investors may face fraud, the Syndicate model may incur malicious collusion, high failure rate of startups and low liquidity of the startups’ shares could make most of the investors lose all of their investment; the investors may be aware of the risks of the Equity-based Crowdfunding. So that how to regulate is a common challenge for the regulators all over the world.For analysis of the Regulating of Equity-based Crowdfunding, we shall comprehend the nature of Equity-based Crowdfunding. A large amount of investors could invest in Equity-based Crowdfunding via the Internet. And from the perspective of the term of Security, the shares of Limited Liability Corporation are not provided in the Chinese Securities Law, and there is a debate about if the Equity-based Crowdfunding belongs to the security offering. However, based on a analysis of legal characters for Securities and a foreign experience of Securities judgment, and the Draft of Measures for Private Equity-based Crowdfunding( "Draft") promulgated by the relevant Chinese authority, both the Securities Law Theory and practical supervision obviously deemed that the share belongs to security, and the Equity-based Crowdfunding need to comply with the provisions of the Chinese Securities Law. Besides, the Equity-based Crowdfunding might constitute an Illegally Taking in Deposits from the General Public or Issuing Stocks without Approval in accordance with Criminal Law. As a result, the forbidden areas of Illegal Fund-Raising and Public Offering are limiting the Equity-based Crowdfunding all the time. So that, requirements that can not offering to public, less than 200 investors, can not promote by public media and can not undertake to pay back in a certain period, all have become the obstacles for the development of Equity-based Crowdfunding. The standard that offering to more than 200 people has a long history, which was transplanted from the limitation for the number of investors of private placement in America, but it is not coordinated with Accredited investors system of America. As a result there are lots of problems when using this standard, and it is a main reason of the difficulty for folk financing in China. Therefore, I suppose to expand the definition of security and revise the Public Offering Standard.The domestic regulator promulgated the Draft, but except the Illegal Fund-Raising and Public Offering there is a supervision vacuum for the platforms, investors, issuers’ requirements and the campaign’s operations of Equity-based Crowdfunding. And there are some defects in the Draft, and it could not be effective to guard against risk for investors. Therefore, except for not to commit Illegal Fund-Raising, there is a regulatory vacuum for Equity-based Crowdfunding which means that no protection for investors. From the perspective of Behavioral Science, the crowd of investors in Equity-based Crowdfunding could have two contradicted characters, the wisdom of the crowd and the madness of the crowd. The crowd often makes crazy collective decisions because of the madness of the crowd. The investors’ madness in Equity-based Crowdfunding results from the Herd Behavior, so that I suppose to applying the Information Disclosure Policy to promote the independence of the investors and dismiss the Information Asymmetry, and to lead the investors in Equity-based Crowdfunding to be wisdom. As a result, taking into account of the Cost of Regulation, Agency Cost and the Financial Effectiveness, I suppose to learn the regulation policies thereof from America and Britain, so that the issuers, platforms and angels shall collectively be responsible for the information disclosure. I also suppose to construct diverse information disclosure policies, such as Initial Information Disclosure and Ongoing Information Disclosure, and applying different Risk Warnings for different campaigns.The Draft set an access requirement for the investors in Equity-based Crowdfunding, that investors should meet the qualified investor requirement. However, the standard that whether an individual investor is qualified, is just based on the amount of financial assets or personal income, and is not based on the special relationships, such as an employee of the investee company, and is not based on the investment experience and advised by professional investment institutions. Besides, the Draft did not provide the exemptions of the number cap of investors and the public promotion for Qualified Investors. Even though the common investors want to realize the Financial Participation Right, there is no way to invest in Equity-based Crowdfunding. Actually, this sort of qualified investor policy of Equity-based Crowdfunding, would prohibit the access of investors and heavily decrease the financial effectiveness, and violates the Economic Law’s principles of Economic Freedom and Equality. Therefore, I suppose to apply the Qualified Investor Exemption for qualified investors, and constitute a multi-level qualified investor policy, by which the investors who have special relationships, investment experience or advised by professional institutions could be deemed as qualified investors, and apply the Investors Appropriateness Test so that allowing the ordinary investors to invest in Equity-based Crowdfunding under the investment limitation based on assets or income. So that, the risk understanding and bearing capacity could be corresponding to the risks borne by investors, which is good for the balance of financing effectiveness and investors protection.