Crowdfunding 2015 Survey Responses Report

i Crowdfunding 2015 SURVEY RESPONSES REPORT THE BOARD OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS FR29/2015 December 2015 ii Copies of publications are available from: The International Organization of Securities Commissions website www.iosco.org © International Organization of Securities Commissions 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. iii EXECUTIVE SUMMARY 1. Introduction The IOSCO Committee for the Regulation of Market Intermediaries (Committee 3 or C3) has carried out a fact-finding survey to accomplish two goals – first, to enhance IOSCO’s understanding of developments in members’ current or proposed investment-based crowdfunding regulatory programs and second, to highlight emerging trends and issues in this area. This Report provides a summary of the responses from the survey. 2. Responses Jurisdictions surveyed reported a variety of approaches to regulate crowdfunding. Among other things, some jurisdictions apply their general securities regulatory framework, which often allows the use of certain built-in flexibilities, while others have either introduced (or have proposed to introduce) ad hoc regulatory crowdfunding regimes. While these measures are quite diverse and tailored to specific regulatory and market concerns in the respective jurisdictions, some high level similarities appear present. One major commonality is the objective of achieving a balance between risks/investor protection related concerns and the positive role securities markets can play in supporting economic recovery and growth through the promotion of crowdfunding. It is clear, however, that the particular way this balance is shaped varies from one jurisdiction to another. Among the regulatory measures to foster crowdfunding, the review demonstrated that most jurisdictions that have introduced (or have proposed to introduce) ad hoc regulatory crowdfunding regimes require: • Lighter entry requirements and, less frequently, special conduct of business provisions for the funding portals; and • Limited reporting requirements for issuers. These flexibilities are usually counterbalanced by a number of focused restrictions or tailored rules meant to ensure integrity of information and protect investors. For instance, less onerous provisions on funding portals are usually counterbalanced by: • A number of limitations on the services and activities the portal is permitted to perform; • The duty to appoint a third party custodian to hold an investor’s assets; • Limitations to an investor’s ability to access funding portals; and • Imposing risk acknowledgement and investor education regimes. Another commonality that emerged from the review is that restrictions may apply to cross-border crowdfunding fundraising. For instance, special crowdfunding regimes often provide that the issuer and/or the managers running the funding portal must be incorporated locally. iv More broadly, jurisdictions employ a number of regulatory measures designed to address the major risks considered with crowdfunding:  Risk of default and high failures of start-up businesses Many members require funding portals / intermediaries to conduct some due diligence on the issuer and/or the crowdfunding offerings. This may consist of, for instance: • Conducting a mandatory review of issuers’ business plans to ensure that the issuers have genuine business ideas; • Disclosing the criteria used in the project selection process; and • Reporting to the regulator successfully completed offerings. Another way members have designed measures to address this risk is that access to the funding portal maybe denied if: • There is a reasonable basis to believe that an issuer is subject to a disqualification; or • Professional investors do not undersign a percentage of the offer. Also, a common mechanism adopted by many jurisdictions designed or proposed to be designed to protect investors against risk of default is to place a limit on investment amounts.  Platform failure Some respondents impose specific requirements on intermediaries to: • Ensure the integrity of the information received and published through the funding portals; • Establish proper IT systems and back-up facilities; • Have sound procedures to ensure that in case of activity cessation, they continue to provide all or part of the services they committed to provide.  Fraud and money laundering/terrorist financing As a general rule, the responding jurisdictions address these risks by applying the same regulatory provisions on fraud and money laundering