A Study On The Moral Hazard And Its’ Legal Regulation Of The Equity-based Crowdfunding In China

In these years, the development of the Internet finance has caught more and more people’s attention. The convenience and efficiency brought by the Internet finance has contributed a lot to the investing and financing activities. Equity-based crowdfunding, which is one of the forms of the Internet finance, has given many good chances to many emerging enterprises who are eager for money and ordinary investors who want to be angel investors. Meanwhile, it has also made for the improving of the capital market, promoting the level of finance democracy and creating much more jobs. Although equity-based crowdfunding has so much advantages and has already achieved rapid growth in our country, the moral hazard which might or has existed still worth our attention. Because moral hazard, which is always caused by information asymmetry and inefficient incentive and constraint mechanism, would drive agents to focus more on their own utilization instead of principals’ interest while the later has no method to observe former’s activities and gets hurt finally. This phenomenon would do harmful to the protection of the equity-based crowdfunding investors and achievement of the issuers’ long-term interest, which is no good to the further development of the whole industry either.So in this thesis, the moral hazard of equity-based crowdfunding was selected as the main topic. The author tried to find out the reasons which can be used to explain the existence of the moral hazard in the progress of the equity-based crowdfunding activities and methods may lead to the elimination of these problems. In order to get the right answer, the author have studied the characteristics of the Internet finance, the current business model used by most funding portals and the financial law system in China. In addition, the research into many foreign laws which was made to solve this kind of problems also enlightened the author a lot.The construction and the content of this thesis was settled as follows:Introduction: This part was written to state the background, the purpose and the significance of the research. Besides, the existing achievements got by other scholars has also be introduced and commented.Chapter 1: In this chapter, through the observation on the most famous funding portals in China, such as Dajiatou, Angelcrunch, VC, etc, and some relative cases, the author has found that the main manifestation and the damages of the moral hazard in equity-based crowdfunding. Different participants had different behavior patterns which could induce the occurrence of some moral hazard. In detail, issuers would committed fraud in the processes of issuing and the projects management. Meanwhile, they would also restrict the investors to excise shareholders’ rights via abusing their rights brought by their major holders position. And the possibility that there would be conspiracies between issuers and major investors or funding portals which might damage investors’ interests can not be ignored either. As to funding portals, in order to acquire more brokerage, they would lower their issuers verifying standard to let more issuers can raise money. Moreover, they might use the money which was secured during the fund-raise period without notifying investors. These two problems should be considered as the main moral hazard caused by funding portals. The moral hazard from investors might include stealing business ideas and intellectual properties from issuers, relaxing their watch on issuers because of some major investors who had be bribed by issuers, shirking problems brought by major investors and so forth. These moral hazard would threat the interest of investors, issuers and funding portals and become great obstructions to the further development of the whole equity-based crowdfunding industry.Chapter 2: This part meant to find out the reasons lead to the moral hazard above. When turns to this question, many people think the defects in the business model of funding portals are playing an important role. The author have the same opinion. But he pointed out that the financial repression policy and the terrible corporate governance environment in China should be take into account as well. The former one forced funding portals to circumvent the law and have to chose unreasonable business model, while the later one made the corporations in the area of equity-based crowdfunding become places where investors could only take adventures.Chapter 3: This part focused on the legal regulation of moral hazard in equity-based crowdfunding. The moral hazard does go against the protection of participants and the long-term development of the whole industry. Thus, effective legal regulatory measures must be adopted immediately. And eliminating the information asymmetry as well as establishing proper motivation and restriction mechanism should be regarded as one of the most important missions in legal regulation. The author thought in the progress of law making, we should definitude a clear idea and goal of regulation. Then the current financial legal system should be amended to embrace equity-based crowdfunding. For this purpose, the amendment and reinterpretation of securities law, company law, criminal law and civil procedural law should be seen as an urgent task. Besides, the enactment of specific rules for equity-based crowdfunding should be as same vital as other measures. These rules should focus on the regulatory department, standard and methods of supervision to the equity-based crowdfunding and the regulation of the entire progress of the business by means of adopting various regulatory measures.Chapter 4: This chapter reviewed the main discoveries and conclusions and could be seen as the final summarization of this thesis.