Research On Legal Protections For Equity Crowdfunding Investors In China

As a newly emerging method of issuing securities, that is neither similar with the public offering in stock exchanges or the private equity funds targeting highly professional or financially qualified investors, equity crowdfunding has been widely used by Chinese micro enterprises as a financing method. Without the supervision of stock exchanges and the advantages of funding and experiences, crowdfunding investors accept comparatively high levels of risk. This dissertation examines the literature in respect of crowdfunding both at home and abroad, widely investigating representative crowdfunding platforms and carefully comparing the laws on equity crowdfunding in the U.S. and the UK, with the hope that this enlightenment will be useful in guiding the development of the corresponding Chinese legislation, and assist in the drafting of a set of practical legal regulations with low operating costs to ensure that equity crowdfunding investors can receive effective legal protection.This dissertation is divided into four sections:The first section answers the question "what is equity crowdfunding?" It points out that equity crowdfunding is a public offering with comparatively small issuance,outside of the context of stock exchanges. Further, the nature of its characteristics,modes of operation and internal legal relations give rise to high risks hidden in the investing process.The second section answers the question "why does equity crowdfunding investors need the protection from new legal regulations?" Firstly, several principles and theories in the Securities Law and Economics of Law are analyzed, and the importance for protecting investors is demonstrated. Then, the legal risks that investors may face are examined, and the reasons why said investors lack the ability to employ anti-risk mechanisms are considered. It is noted that the protection provided by the current legal system is inadequate. This section explains and demonstrates the necessity for conducting further research.The third section answers the question “what lessons can be drawn from the corresponding legislation in America and England?” Relevant legislation is introduced first and then several core regulations are discussed. Subsequently, the section analyzes the reasons behind the similarities and differences in the above two countries’ legislation, as a result of their legislative backgrounds, and it is concluded that we can only learn from these experiences if our securities markets and relevant regulations exist within similar conditions.The fourth section intends to answer the question "how can the law be used to effectively protect the interests of crowdfunding investors in China?", and it is determined that this goal can be realised in three ways:Firstly, with regard to legislation, the eligible issuers should be those small micro enterprises whose volume of issuance is not higher than 5 million yuan within 12 months, and they are supposed to assume the obligations including disclosing a series of information with concise language, compensating or allowing investors to cancel the transaction in the event that they fail to disclose required information correctly or completely, and not financially compensating anybody for advertising or promoting sales of their issuance. Secondly, for investors, there should be restrictions on the amount allowed to be invested within 12 months according to their personal financial conditions, and they should also be granted the right of unconditionally canceling an investment offer if they sent the offer within 48 hours, as well as the right to use the System of Credit Information of equity crowdfunding market that is planned to be built by the Securities Association of China. Thirdly, equity crowdfunding platforms should be given lower establishing requirements than ordinary securities companies,even though their establishment should also be authorized by China Securities Regulatory Commission. Additionally, those platforms should take responsibility for disclosing information, buying fidelity bonds, and protecting the privacy and security of investors’ information. Also, they should be banned from involving in certain activities including particularly advertising some investment projects, providing investment advice to investors and having interest relationship with the issuers.When it comes to the application of the above legislative suggestions, this dissertation holds that the financial disclosure rules should give different standards to issuers with different volumes of issuance; issuer exemption rules should no longer apply under certain condition; investor education and investment restrictions should not apply to investors who have substantial professional knowledge or experience.In respect of legal remedies, an Online Dispute Resolution and a Financial Ombudsman Service should be introduced, to make up for the defects of the current system of relief, including failing to set advantageous rules for investors and high negotiation costs, making it difficult for disputed two parties to achieve an agreement.