Remarks on the German Regulation of Crowdfunding
Crowdfunding is a buzzword that identifies a sub-set in the new forms of finance facilitated by advances in information technology usually categorized as fintech. In contrast to financial innovation that pertains to (new or redesigned) financial products and is somewhat ambiguous in its social value, crowdfunding capitalizes on previously unavailable digital techniques to match supply and demand on money and capital markets. These developments potentially disrupt traditional forms of intermediation by shifting the boundaries of the (financial) firm. Put differently, crowdfunding does not lead to unprecedented forms of financing relations. Instead, it enables that traditional contractual or corporate law relationships between previously unacquainted providers and consumers of capital are initiated and concluded on novel, IT-driven platforms. From this vantage, the potential of crowdfunding to garner economically significant volumes of financing relationships seems indeed considerable.
Once these projected developments gain traction, policy objectives traditionally pursued in financial regulation also become relevant for agents involved in crowdfunding. Concerns for financial stability, investor and consumer protection, or the prevention of money laundering and funding of terrorism, hinge incrementally on including the new techniques to initiate financing relationships adequately in the regulatory framework. More specifically, the legislation through which policy makers seek to implement the relevant objectives, ceteris paribus, has to be attentive to the specifics of crowdfunding (for a more granular analysis of the normative challenges of crowdinvesting see also John Armour and Luca Enriques, ‘The Promise and Perils of Crowdfunding: Between Corporate Finance and Consumer Contracts’ (2017), ECGI - Law Working Paper No. 366/2017, and their OBLB post here).
In a recent paper that is forthcoming in the Revue Trimestrielle de Droit Financier (RTDF), I analyze the German regulation of crowdinvesting and find that it does not fully live up to the regulatory challenges posed by this novel form of digitized matching of supply and demand on capital markets. It should better reflect the key importance of crowdinvesting platforms, which may become critical providers of market infrastructure in the not too distant future. From the policymaker’s perspective, the exemption from any licensing requirement for platforms, which is not only advocated by the majority view in the doctrinal literature but also present in the supervisory practice, is hard to justify. Providers of financial services are subject to certain conduct rules, which are supposed to safeguard the preconditions for efficient investment decisions on public capital markets that operate smoothly and continuously. Once again, the more financing relationships are initiated and concluded through crowdinvesting platforms, the more important their operational effectiveness becomes. Ultimately, this observation may call for specifically tailored conduct rules. Such a regime could be part of the European Capital Markets Union project.
Moreover, platforms can play an important role in investor protection that cannot be performed by traditional disclosure regimes geared towards more seasoned issuers. To illustrate my point, my paper plots cost curves of individually optimal and regulatorily imposed higher levels of disclosure obligations, against the marginal return curve. It shows that there is an immediate loss in funding available for the proposed project if costs associated with the disclosure regime are higher than privately optimal for the individual issuer, because issuers will offer less or even no securities to the market.
It is still conceivable, though, that positive externalities from higher than individually optimal levels of disclosure, that may accrue because information asymmetries across primary and secondary markets are reduced beyond the individual issuer, offset the associated loss in total output. Yet, the size of positive externalities is critically determined by how much information beyond the individual issue of securities can be extrapolated from the offering, and how many firms are actually similarly situated. In this regard, tiny ventures that source capital through crowdinvesting at early stages of their business development seem highly idiosyncratic. Against this background, the creation of an exemption from the traditional prospectus regime seems to be a plausible policy choice. However, it needs to be complemented by an adequate regulatory stimulation of the platforms’ role as gatekeepers.
Tobias Tröger is Professor of Private Law, Trade and Business Law, Jurisprudence, at the Goethe University, Frankfurt.
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