• Fernando Zunzunegui

Some policy proposals for crowdfunding regulation in a platform economy

In a recent paper we deal with the systematic and conceptual framework for crowdfunding regulation. We do so from a functional perspective. Crowdfunding is part of the digital service platform economy. These platforms have been described as society's new infrastructure. The financial nature of the activity gives them autonomy. The platform is its main tool. It arises from combined provision of primary market services and other financial services. This combination gives rise to a new hybrid service that until now has lacked adequate regulation. What is of interest from a financial perspective is a crowdfunding service that is richer and more sophisticated than a meeting point.

From a functional perspective, it is a financing mechanism through platforms that operate online. The form in which raising financing is implemented, whether through securities or loans, does not alter its function. We consider to be right in regulating crowdfunding in a unitary manner. From our point of view, a natural complement of crowdfunding is offering liquidity to investors that are clients of the platform. The crowdfunding system is currently incomplete, since without provision of liquidity, the crowdfunding market cannot develop.

Regulation of crowdfunding is guided by the same principles as the rest of financial services. It must ensure the smooth operation of the market with efficiency, stability and integrity, ensuring adequate investor protection. Technology gives rise to new services, but the function remains, i.e. financing projects from the public's savings.

Although the original approach based on promotion could be justified, the regulation of crowdfunding must be guided not only by the principle of efficiency to promote competitiveness, but also by the other principles of financial regulation. The development of crowdfunding constitutes a threat to the stability of the financial system, and it is not sustainable without adequate investor protection.

We are dealing with a service that integrates market services with provision of other financial services. The nature of the service determines its regulation. Unintegrated predigital regulation is no longer adequate. We are moving towards an omnibus regulatory model. The diversity of local frameworks is giving way to a degree of confluence from which certain considerations can be extracted. Reforms are guiding the legal framework towards the same type of solutions. The paper analyses the following ten issues. (1) Regulation requires global principles and coordination between different financial authorities. (2) Local regulations are obstacles to the development of platforms whose service offer knows no borders. (3) Regulation of crowdfunding must be “functional” in view of the economic role it plays in facilitating financing through the internet. (4) Provision of crowdfunding services should be reserved for institutions previously authorised by the financial authority. (5) Crowdfunding providers should be allowed to offer secondary trading services. This complement provides the necessary liquidity for products contracted through the platforms. (6) Providers must have product governance policies as the basis for selecting products and designing contracts to adapt the offer to clients' needs. (7) Providers must have a system for assessing their clients. Providers must provide information about the nature and risks of the products they design and select and must disclose any conflicts of interest. (8) Platforms must have education plans for their clients, in particular retail investors. (9) The platform's liability towards its clients for losses caused in providing its services should be clearly defined. (10) The principle of sectoral solidarity is applied. In order for the new activity to be sustainable, sufficient guarantees must be provided. The main direct guarantee against fraud is the creation of a fund, financed by the platforms' owners, in order to cover losses caused by cases of fraud or insolvency of crowdfunding service providers.

Fernando Zunzunegui - Universidad Carlos III

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