China is currently the world’s largest ECF market - market volume reached USD 948.26 million in 2015, exceeding that of both the US (USD 598.05 million) and the UK (USD 405.45 million). China also now has the world’s largest ECF platform in terms of equity financed, with ‘AngelCrunch’ (‘tianshihui’) successfully raising a total of RMB 4 billion (about USD 594 million) since it was established.
However, unlike the US, the UK and many other countries that have taken concrete legislative steps to regulate ECF, there is neither a clear definition of ECF nor a legal framework governing ECF in China. Rules and regulations that have been released thus far are mere interim measures or guidelines. The regulatory lacuna has contributed to regrettable uncertainty in the legitimacy of ECF platforms and the legality of ECF transactions. There have also been an increasing number of disputes regarding ECF platforms’ failure to perform their role as neutral intermediaries in the distribution of information relating to the fundraisers.
My article ‘Managing the Risks of Equity Crowdfunding: Lessons from China’ focuses on the risks of ECF and explores various regulatory, contractual and market mechanisms for managing risk. Based on empirical studies in China, I posit that ECF suffers from agency problems and information asymmetries in an extreme form. The Chinese experience shows that many Chinese ECF platforms are not neutral intermediaries in linking investment opportunities with sources of funds. My article further contends that, in the Chinese market, private ordering will not address the agency and information asymmetry problems inherent in ECF platforms. Contractual designs adopted by numerous platforms, especially that of the syndicate contract, not only fail to address the conflicting interests at play but also introduce additional conflicts. Other market mechanisms such as reputation, exit, and private insurance, are also insufficient to ensure investor protection. In this light, this article proposes specific regulatory measures on ECF platforms to enhance investor protection.
This article should be of particular interest to policymakers and legislators in jurisdictions which are establishing or reforming ECF regulations.
Lin Lin is an Assistant Professor at the Faculty of Law of the National University of Singapore.