the equity in equity crowdfunding

Abstract

The economic importance of equity crowdfunding comes from its ability to provide a solution for small enterprises that face difficulties achieving their required funding through conventional financing methods. However, due to information asymmetry, agency costs and economic biases, investment in equity crowdfunding is susceptible to many risks. Thus, equity crowdfunding regulations face a challenge to strike a balance between investor’s protection and supporting innovation in financing methods for small enterprises.

There are various risks to investors in equity crowdfunding. One of them is fraud, which might threaten equity crowdfunding due to the vulnerability of some investors in the online environment, economic biases and information asymmetry.

Accordingly, this research asked the question: to what extent are the UK and US equity crowdfunding regulations – the most notable models of regulation – appropriately protecting individual investors from fraud?

By taking a functional comparative approach and using the literature about financial regulations – mainly about market failure and regulation strategies — while considering the relationship between equity crowdfunding and securities regulations, this research argues that the most appropriate approach TO REGULATE EQUITY CROWDFUNDING is releasing the issuers from onerous obligations under securities regulations and using less costly mechanisms for protecting investors that are suitable for equity crowdfunding. Examples include the cap on investment and empowering the wisdom of the crowd. Both UK and US regulations can be improved by adopting more inventive measures to protect investors in the former while releasing issuers from costly obligations in the latter.