IOSCO Publishes Statement on Regulation of Crowdfunding

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Tuesday, December 22, 2015 12,09 PM / IOSCO/MR/53/2015

The International Organization of Securities Commissions (IOSCO) today published a Statement on regulation of crowdfunding.

IOSCO believes it is important for regulators and policy makers to balance the need for supporting economic growth and recovery with that of protecting investors when developing crowdfunding as a means to invest in small firms and start-ups.

Drawing on the findings from the Crowdfunding 2015 Survey Responses Report published today, IOSCO would like to raise awareness regarding some of the major risks investors face when investing in crowdfunding. It also would encourage regulators and policy makers to note the measures currently taken by regulators to address the risks inherent in crowdfunding.

Because crowdfunding is in its infancy, IOSCO has not yet proposed a common international approach to the oversight or supervision of crowdfunding. But the Statement encourages regulators to take into account possible cross border implications

IOSCO publishes 2015 Survey Responses Report on Crowdfunding
The International Organization of Securities Commissions (IOSCO) published today the
Crowdfunding 2015 Survey Responses Report (Crowdfunding Report).

 

The Crowdfunding Report presents a summary of responses to a fact-finding survey of twenty-three IOSCO members.  The Study had two goals – first, to enhance IOSCO’s understanding of developments in members’ current or proposed regulatory regimes for investment-based crowdfunding and second, to highlight emerging trends and issues in this area.

 

The jurisdictions surveyed reported a variety of approaches to regulate crowdfunding. Some jurisdictions apply their general securities regulatory framework, which may be sufficiently broad and flexible to address crowdfunding. Other jurisdictions have either introduced (or have proposed to introduce) specific regulatory crowdfunding regimes. The report highlights that most regulatory regimes for crowdfunding are in their early days.

 

The Crowdfunding Report also provides an overview of factors that regulators may find useful to the development of regulatory measures for addressing the inherent risks unique to crowdfunding activities. The goal is to achieve a balance between promoting crowdfunding and ensuring investor protection and market integrity. Some of the regulatory measures described in the Crowdfunding Report include: 

  • customizing entry, registration, or licensing requirements;
  • setting disclosure requirements for issuers and funding portals;
  • limiting the services that may be provided by  crowdfunding platforms;
  • requiring the appointment of a third party custodian to hold investor assets;
  • imposing measures to favour the channeling of resources into local businesses;
  • addressing cross-border issues.

 

The report also seeks to raise investors’ understanding of crowdfunding, e.g., that crowdfunding may differ from investing in more traditional securities products.  In addition to take note of risks common in traditional finance such as conflicts of risks, data protection and fraud, it suggests that investors pay attention to certain key aspects, including:

  • Information asymmetry: Risk of default or high failures is often associated with start-up businesses. The risk of fraud may be high in case of internet offers. Investors should review disclosure and education materials to further their understanding of the essential features and main risks of the crowdfunding offer and see if third party custodians are being used.
  • Platform failure: There is risk of platform failure for crowdfunding portals. Portals should be evaluated based on their credibility and soundness, including if it has the proper IT systems, back-up facilities and procedures to ensure continued service.
  • Investing limits: Investors should consider if the investment amount is appropriate for their net worth.
  • Rescission, cancellation: Investors should be informed of and understand the investment terms including cancellation or rescission rights. 
  • Illiquidity: As restrictions could be put on the resale of crowdfunding securities, investors should pay attention on warnings and information regarding liquidity and the availability of secondary market.
  • Suitability: Investors should consider that a crowdfunding offer may not be suitable and consistent with their investment objectives and risk profile.

 

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