Part IV Crowdfunding Regulation and Policy Cumming Johan

Part IV. Crowdfunding Regulation and Policy • Cumming & Johan (2019, Chapters 15 -19) 15. Introduction to Crowdfunding Regulation and Policy 16. Demand Driven Crowdfunding Regulation 17. Public Policy Towards Entrepreneurial Finance: Spillovers and Scale Up 18. Regulation and Investment in Fintech Ventures 19. Crypto Regulation Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Introduction to Crowdfunding Regulation and Policy • Cumming & Johan (2019, Chapter 15) 2 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Why Do We Need Equity Crowdfunding? (1 of 3) 3 • The U. S. Securities Act of 1933 was put in place specifically to deal with problems of improper disclosure and oversight associated with securities offerings, much of which was believed to be tied to the causes of the 1929 stock market crash. • Crowdfunding is the antithesis of securities regulation, as it enables the distribution of securities without the accompanying disclosure that is normally required. • Professor Jeffrey Mac. Intosh at the University of Toronto Faculty of Law has colorfully noted that – “If you utter the word “crowdfunding” in front of a dusty old-fashioned securities lawyer, make sure you have a fully charged defibrillator on hand. Perhaps a fully equipped contingent of ER doctors and nurses. It won’t be pretty. “ Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion Why Do We Need Equity Crowdfunding? (2 of 3) • The demand for equity crowdfunding has been seen through cases such as Oculus Rift, as discussed in Chapters 4 and 8, which was funded with rewards crowdfunding and backers did not share in the returns associated with the acquisition exit to Facebook. • Similarly, commentators have noted that, prior to the JOBS Act, it was strange to be allowed to bet $5, 000 at a casino but not be allowed to invest $5, 000 in an entrepreneurial start-up in the US. • The catch-22 with securities regulation and start-ups is that the cost of regulation is too onerous for the amount of capital that is needed at the startup stage. – Prospectus documents can cost hundreds of thousands of dollars in terms of legal and accounting fees, and fees of other service providers. So if they capital raise is less than costs of prospectus compliance and other regulatory costs, start-ups would never be able to raise capital. As such, there is clearly a demand for equity crowdfunding. 4 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion Why Do We Need Equity Crowdfunding? (3 of 3) • But regulation around crowdfunding is likewise needed. To highlight this regulatory need, we begin our examinaton of crowdfunding regulation in this chapter by presenting some cases of fraud in crowdfunding markets. • In the next slides, we provide examples of fraud, including fraud amongst rewards and equity crowdfunding campaigns, as well as fraud on behalf of crowdfunding platforms. – The first four cases: entrepreneurs carrying our alleged fraud on rewards crowdfunding platforms, – The fifth and sixth cases: alleged fraud carried out by entrepreneurs raising money on equity crowdfunding platforms. – Seventh and eighth cases: fraud from portals, not entrepreneurs. 5 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded i. Back. Pack (1 of 2) • i. Back. Pack Raised over $720, 910 from 4, 032 backers over three campaigns (the first in 2015, which raised $445, 353 from 1, 946 backers) on Indiegogo – • https: //www. indiegogo. com/projects/ibackpack-wifi-ultra-thin-powerful-batteries And then raised $76, 694 from 252 backers in 2016 on Kickstarter – https: //www. kickstarter. com/projects/ibackpack-20 -3 g-4 g-mi-fi-bulletproofbluetooth-aud. 6 • The campaign was well structured with many rewards levels, diagrams, puctures, and videos. • And the concept is clearly interesting for millenials, offering storage and charging features for i. Phones on the go, as evidenced by the multiple campaigns on both Indiegogo and kickstarter. Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded i. Back. Pack (2 of 2) 7 • Unfortunately, the founder stopped communication with the crowd, removed videos from You. Tube, and did not provide updates to the crowd in terms of whether or not the backpacks would be delivered (or even existed). • The founder claimed that there was frustration and mistake associated with creating the project due to problems with the storage batteries, such that a safe product could not be created; however, those claims do not appear to be true as other have shown no problems with the batteries. • The US Federal Trade Commission (FTC) investigated in 2018 and lawsuit in 2019 revealed fraud. • Apparently, the founder used the backers‘ money to buy Bitcoin and pay personal expenses. Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Kobe Red (1 f 2) 8 • The Kickstarter campaign attracted a lot of attention, securing pledges totalling $120, 309 (and with a mere $2, 374 goal) from more than 3, 000 backers. • https: //www. kickstarter. com/projects/kobered/kobe-red-100 -japanese-beerfed-kobe-beef-jerky/description • But Kickstarter closed the campaign just before it ended, so that the funds were never transferred to the founder, a company called “Magnus Fun“. • https: //money. cnn. com/2013/06/17/technology/kickstarter-scam-kobejerky/ Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Kobe Red (2 of 2) • Kickstarter closed the project after collective efforts from the crowd (the “wisdom of the crowd“), including a documentary film maker, and comments revealed problems. 1. There were no pictures or videos of the founders identifying themselves. 2. The positive comments on the updates part of the Kickstarter campaign page were mainly from new account holders that had only previously backed unsuccessful campaigns. 3. The pledge requests from backers were notably very small relative to the costs of the rewards offerings, if those reward offerings were ever to be delivered. 9 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Skarp Laser Razor (1 of 3) • The Skarp Laser Razor originally campaigned on Kickstarter and raised more than $4, 005, 111 (of a mere $160, 000 goal) from 20, 632 backers. • It is easy to see what the product was popular, as it involved a shaver with a lazer to remove hair. – https: //www. kickstarter. com/projects/skarp/the-skarp-laser-razor-21 st-century-shaving 10 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Skarp Laser Razor (2 of 3) 11 • But was there actually a product? The funding was suspended by Kickstarter after it learned that the prototype product did not actually work (a requirement of Kickstarter). • The company was banned by Kickstarter (and bans are never reversed, as highlighted by Kickstarter in the accouncement of this ban). • Surprisingly, after the Kickstarter ban, Skarp Laser Razor then created a new campaign on Indiegogo. • The Indiegogo campaign was popular as well, albeit not as popular as the Kickstarter campaign, but nevertheless led to a $507, 810 capital raise by 2, 787 backers in late 2015. Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Skarp Laser Razor (3 of 3) • The product was never delivered. Commentators on the web have noted as at October 2018 that the Chief Technology Officer no longer works for Skarp based on a Linkedin update. – Commentators continue to assett that the technology is more a pseudo science, and the product will never be delivered. • It is a remarkable case, as Indiegogo backers appear to have had fair warning but nevertheless gave Skarp more than $500, 000. – https: //www. digitaltrends. com/cool-tech/biggest-kickstarter-and-indiegogo-scams/ – https: //www. theverge. com/2015/10/13/9518163/laser-razor-kickstarter-banned-indiegogo – https: //www. indiegogo. com/projects/the-skarp-laser-razor-21 st-century-shaving#/ – https: //www. reddit. com/r/shittykickstarters/comments/9 qcz 90/skarp_laser_razor_unofficial_ update_october_2018/ – https: //www. digitaltrends. com/cool-tech/biggest-kickstarter-and-indiegogo-scams/ 12 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Triton (1 of 2) • • Similar to Skarp, Triton is another pseudo science product that offered liquid oxygen cylinders as a substitute for traditional scuba breathing gear. The campaign on Indiegogo was popular, leading to more than $900, 000 in backing. – https: //www. indiegogo. com/projects/world-s-first-artificial-gills-oxygen-respirator-2/coming_soon • But the product could not be made, since it was pseudo science. – And the company failed to consider regulatory approval requirements for the product. – In 2016, the company had to acknowledge that the science did not work and had to pay the $900, 000 it raised from their backers. • 13 The $900, 000 was transferred back to the backers prior directly from Indiegogo, since the acknowledgement that the product did not work came prior to the campaign’s conclusion (i. e. , no funds were ever transferred to the founders). Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Triton (2 of 2) • Nevertheless, the company relaunched their campaign on Indiegog, raising over $240, 000 from a $50, 000 funding goal. – The company continues to maintain an Indiegogo presence, signalling confidence that they will eventially deliver this new similar product. • The case reinforces the issue that, as with the Skarp case, Indiegogo backers can show strong support for promoters of entrepreneurs with proven failed products. – https: //www. digitaltrends. com/cool-tech/triton-scuba-mask-indiegogo-possibly-hoax/ – https: //www. ibtimes. co. uk/triton-artificial-gills-creators-repay-nearly-900 k-after-misleadingindiegogo-backers-1553086 – https: //www. reddit. com/r/shittykickstarters/comments/4 zr 6 ej/what_happened_to_triton/ 14 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Elio Motors (1 of 2) 15 • Unlike the four prior cases of apparent fraud on rewards-based crowdfunding platforms, the Elio Motors campaign was an equity crowdfunding campaign on Start. Engine. • https: //www. startengine. com/elio-motors • Elio Motors offered an electric car with up to 84 miles per gallon at a target base price of $6, 800, including over 65, 000 that reserved a model ahead of time (thereby mixing rewards and equity crowdfunding). • The campaign attracted 6, 345 investors that invested $16, 917, 576 of a $25. 1 million campaign goal. Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Elio Motors (2 of 2) 16 • • Unfortunately, the case is a classic case of basic moral hazard (Chapter 2). The company used the funds on suspicuious soft expenses (i. e. , paychecks) within a few short months. The release date of the product has been delayed for years, and most commentators are skeptical that the product will ever be delivered. • https: //www. sec. gov/Archives/edgar/data/1661779/000114420418023766/t v 492475_partii. htm • https: //www. digitaltrends. com/cool-tech/biggest-kickstarter-and-indiegogoscams/ • http: //laweconomicscapital. com/2017/01/crowdfunding-fraud-lessons-fromelio-motors/ Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Ascenergy (1 of 3) 17 • Ascenergy’s crowdfunding case is a similar example of the misuse of funds, as with the Elio Motors case, again highlighting basic moral hazard problems that we introduced in Chapter 2. • Ascenergy is an oil and gas company that had solicited money on websites including Crowdfunder, Fundable, Equity. Net, and Angel. co (Angel. List). • Ascenergy raised $5, 112, 473 million equity crowdfunding in 2015 from 90 investors. • The SEC accused the company of fraud, asserting that only $2000 was spent on oil and gas, while $3. 8 million went to a company for web and mobile app development, $100, 000 went to a company controlled by the CEO Joseph “Joey“ Galbadon, and $1. 2 payments seemed personal in nature, as the SEC stated. Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Ascenergy (2 of 3) • SEC: – “Ascenergy has raised at least approximately $5 million from 90 investors nationwide and internationally. Ascenergy has already spent at least $1. 2 million of the offering proceeds, but only a few thousand dollars appear to have been used for oil and gas-related expenses. Instead, a significant part of the $1. 2 million has been spent on payments to Galbadon or companies he controls, or for expenses unrelated to the oil & gas business, including, by way of example, foreign travel, fast food restaurants, Apple stores and i. Tunes, dietary supplements, and personal care products. ” – https: //www. crowdfundinsider. com/2015/12/77955 -the-first-investment-crowdfunding-fraud -what-does-this-mean-for-the-industry/ • 18 The full amount of capital raised had to be repaid with interest, and Gabaldon was held liable for a civil penalty of $320, 000, while Ascenergy was liable for a civil penalty of $1, 550, 000. Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Ascenergy (3 of 3) 19 • At the time of the decision, commentators such as the CEO of Crowdcheck have asserted that platforms are liable in cases like this one only in the even that misleading statements can be attributable to the platform itself, including the content and whether it was communicated, and how it was communicated. However, further guidance is provided in subsection 15. 2. 8 below. • https: //www. crowdfundinsider. com/2017/08/120747 -final-judgementdocument-ascenergy-crowdfunding-fraud/ • http: //crowdcheck. com/ Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded i. Funding • i. Funding is a real estate crowdfunding portal. The founders of the portal raised over $3 million from 42 investors across 17 US states to build the portal. The SEC charged the founders on September 26, 2018 with the misappropriation of the funds raised to build the portal. Specifically, the SEC stated – “From at least October 2013 to November 30, 2016, Skelley and Shah misappropriated investor funds. Skelley and Shah used the debit cards to make numerous purchases for personal items and services. These personal items and services included rent, food, beverages, trips, entertainment, dry cleaning, massages, and withdrawals of cash. None of these purchases or cash withdrawals were for i. Funding’s business operations. Skelley’s and Shah’s purchases and cash withdrawals were far in excess of any salary or deferred compensation owed to Skelley and Shah. ” – https: //www. crowdfundinsider. com/2018/09/139540 -sec-lawsuit-against-real-estatecrowdfunding-platform-ifunding-alleges-fraud-scheme-to-misappropriate-investor-funds/; – https: //www. sec. gov/litigation/litreleases/2018/lr 24288. htm 20 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded • In the US, under Title III of the JOBS Act, equity crowdfunding portals must be registered with the US Securities and Exchange Commission (SEC) either as a portal, or under the more rigorous requirements as broker-dealers. – Portals are obligated to take reasonable measures to protect investors through due diligence checks of the entrepreneurs that promote the sale of securities on their platform, and the information that they share. • The Financial Industry Regulatory Authority (FINRA) has investigatory authority under Rule 8210 (as emplasized in the JOBS Act), and Dreamfunded was the first time that Ryle 8210 was applied against a crowdfunding portal. FINRA’s enforcement action against a crowdfunding portal was carried out on June 5, 2019. The decision banned the founders from FINRA membership and fined $15, 900 in hearing costs. – http: //www. mondaq. com/unitedstates/x/818862/Financial+Services/FINRA+Issues+First+Litig ated+Enforcement+Action+Against+Crowdfunding+Portal and https: //www. fintechupdate. com/2019/06/finra-issues-first-litigated-enforcement-actionagainst-crowdfundingportal/? utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original 21 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded • The February 23, 2018 FINRA complaint alledged that: – “Dream. Funded had (1) made false or misleading claims to investors about offerings promoted on the portal and about the portal itself, (2) continued to allow access to its platform even after it had reason to believe issuers presented the potential for fraud or investor protection concerns, (3) included issuer communications on its website that contained untrue or misleading facts, (4) lacked a reasonable basis for believing the issuers offering securities through its portal had complied with SEC regulations, (5) failed to provide required notice to investors regarding investment commitments, (6) failed to conduct required background checks, and (7) failed to reasonably supervise the activities of the portal. “ • • FINRA’s Funding Portal Rule 200(c)(2) prohibits funding portals from including false or misleading communications on the portal. It is noteworthy that FINRA concluded that requirement does not carry with it a requirement for intent. – http: //www. finra. org/sites/default/files/fda_documents/2017053428201%20 Dream. Funded% 20 Marketplace%20 CRD%20283594%20 and%20 Manuel%20 Fernandez%20 CRD%206639970%2 0 Extended%20 Hearing%20 Panel%20 Decision%20 va. pdf 22 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion i. Back. Pack Skarp Laser Razor Elio Motors i. Funding Dynamite Platforms Kobe Red Triton Ascenergy Dreamfunded Dynamite Platforms • Dynamite Platforms is a crowdfunding alternative dispute resolutions (ADR) platform. They offer “quick and effective solutions“ to crowdfunding disputes by providing “a roster of mediators and arbitrators“ specialized in crowdfunding ADR. Dynamite Platforms takes a percentage fee of “ 10%-15% of the collected amount, or $250, 000, whichever is higher“ (emphasis added). Assessments of cases are free. – • 23 http: //www. dynamiteplatforms. com/crowdfundingadr/ The emergence of online ADRs specialized in crowdfunding is interesting, as it highlights the role of fintech in not merely fundraising but also in the provision of legal services. Further, it shows that the market believes that legal costs are sufficiently high that the provision of legal services can be disrupted in this manner. And just as entrepreneurs are matched with investors through platforms, so too can plaintiffs be matched with specialized crowdfunding ADR mediators and arbitrators. Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion Regulations around the world 24 • Most countries (23 of 42) do not have specific crowdfunding rules. Instead, the general securities regulatory framework has been used to govern decisionmaking • Some recent regulatory changes – E. g. , 2014 US JOBS Act • Canadian change (2015) interesting as not one single entrepreneurial firm raised capital under the new equity crowdfunding rules – Possibly overly restrictive, such as audited financial statements required – Also regulatory fragmentation by province does not help Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Country Australia Regulations No specific equity crowdfunding regulation; General securities regulation applicable; Pending proposal: The Corporations Amendment (Crowd-sourced Funding) Bill 2015; Austria Specific equity crowdfunding regulation is applicable - the Alternative Financing Act of 1 September, 2015 (Alternativfinanzierungsgesetz- Elt. FG); Belgium No specific equity crowdfunding regulation; General securities regulation applicable with several exemptions for crowdfunding, including the Act of 25 April 2014; , the Act of 17 July 2013 (amending the Prospectus Act) and the Act on Alternative Investment Funds Managers of 19 April 2014 (implementing AIFM Directive); Requires a prospectus for every public offering of securities unless they are bellow € 300, 000 per issuer within 12 months, a maximum of € 1, 000 per project per investors; Registered cooperatives may collect up to € 5, 000; No specific equity crowdfunding regulation; General securities regulation applicable; Brazilian Securities and Exchange Commission published a public hearing on equity crowdfunding regulation in December 2016; No specific equity crowdfunding regulation; General securities regulation applicable- Public Offering of Securities Act; Requires a prospectus for every public offering of securities unless they are bellow € 100, 000; Crowdfunding Exemptions are applicable, yet variable from province to province: (See Table 15. 2) Brazil Bulgaria Canada 25 o The Start-Up Crowdfunding Exemption (45 -316) implemented in 2015 for SMEs to raise a maximum of $250, 000 per campaign (maximum two campaigns per year, whereas an individual investor can invest $1, 500; o The Integrated Crowdfunding Exemption (45 -108) implemented in 2016 providing a higher funding ceiling for up to $1, 5 million; Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Country Regulations China In 2015, several Chinese regulatory agencies jointly released the Guiding Opinions on Promoting the Healthy Development of Internet Finance, which sets out general rules also for equity crowdfunding; Croatia No specific equity crowdfunding regulation; The Capital Market Act is strictly applicable; A license from the domestic Financial Services Supervisory Authority is mandatory for providing crowdfunding activities; Prospectus is necessary with certain exemptions; No specific equity crowdfunding regulation; The Investment Services and Activities and Regulated Markets Law, Law 144 (I)/2007 is applicable together with the Alternative Investment Fund Managers Law 56(I)/2013 and the Alternative Investment Funds, Law 131(I)/2014; License is required for the platform operators under the Business of Credit Institutions Law 66/; Prospectus is necessary with certain exemptions; No specific equity crowdfunding regulation; Act no. 256/2004 coll. , on capital markets as well as the Act no. 284/2009 Coll. , on payment services are applicable and place a high regulatory burden on the crowdfunding platforms as they would have to be properly licensed by the Czech National Bank and would have to have at least € 1, 250, 000 minimum capital; Prospectus is necessary with certain exemptions; No specific equity crowdfunding regulation; Crowdfunding platforms are subject to a license requirement from the Financial Services Authority according to the Danish Securities Trading Act (Consolidated Act no. 831 of 12 June 2014); Alternative Investment Fund Managers (Act no. 598 of 12 June 2013) and Danish Fundraising Act are also applicable; Prospectus is necessary with certain exemptions; No specific equity crowdfunding regulation; Estonian Securities Market Act is applicable, Crowdfunding platforms, under the Estonian AIFMD, are deemed to provide investment services as securities brokers; Prospectus is necessary with certain exemptions; Cyprus Czech Republic Denmark Estonia 26 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Country Finland Regulations Since September 1, 2016 the Finnish Crowdfunding Act is in force that covers specifically the equity crowdfunding; The Act introduces a special registry with the Finnish Financial Supervisory Authority; crowdfunding intermediaries are not required to join the Investors’ Compensation Fund and the capital requirement was reduced from € 125, 000 to € 50, 000; Prospectus has to be published only for fundraising securities exceeding € 5 million; On October 1, 2014 the Ordinance no 2014 -559 introduced the new regulatory framework together with two statutes, (i) IFP (Intermédiarie en Financement Participatif) for the loan crowdfunding and (ii) CIP (Conseiller en Investissement Participatif) for equity and bond crowdfunding; Equity platforms must be registered as CIP and the maximum amount that can be raised is € 1 million; Since 2015 even the local authorities may use crowdfunding to finance projects; In 2015 Germany adopted the Small Investor Protection Act regulating the crowdfunding activities, laying down the licensing requirements, exemptions for platforms from the German financial supervisory authority (Ba. Fin); The act established two regimes for investments up to € 1, 000 and of more to an absolute € 10, 000 per investor without differentiating between different types of investors. It further limits the advertisement and specifies the prospectus requirements; Additional changes of the act have been discussed; No specific equity crowdfunding regulation; Act no 3606/2007 is applicable for crowdfunding activities as investment services and transaction of investment activities; Hong Kong Hungary Prospectus has to be published for the offering exceeding € 100, 000 within a period of twelve months; No specific equity crowdfunding regulation, however in 2015 -16 budget speech the HK Financial Secretary set out the intention to undertake a special crowdfunding regulation; No specific equity crowdfunding regulation; France Germany Greece Crowdfunding platforms are subject to investment services requirements under the Hungarian Investment Services Act; license from the Hungarian supervisory authority is required; If a crowdfunding undertaking structures as AIF, it must comply with the requirements under the Collective Investment Schemes Act, Prospectus has to be published for the offering exceeding € 100, 000 within a period of twelve months; Iceland No specific equity crowdfunding regulation; India General securities regulation are applicable Equity crowdfunding is illegal according to a consultation paper of Securities and Exchange Board of India (SEBI) in 2014. However, there have been recent statements that the SEBI plans to introduce a regulatory framework for equity crowdfunding for SMEs. 27 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Country Ireland Regulations No specific equity crowdfunding regulation; AIFMD regulations may be applicable; Prospectus is necessary in case of a public offering of any transferable securities with certain exemptions; Israel The Israel Securities Authority (ISA) is preparing a new regulation and registry for crowdfunding platforms (“offering coordinators”). The law should be adopted in 2017; Italy adopted in 2012 law no. 221/2012, in 2015 law no. 33/2015 and regulation no. 18592/2013 applicable to equity crowdfunding platforms; The Italian securities market authority (CONSOB) carries out oversight; Equity crowdfunding is limited only to (i) innovative startups, (ii) innovative SMEs and (iii) collective investment undertakings and investment companies which invest in the above two; Italian AIFMD does not apply to crowdfunding; Exception from prospectus requirements for public offers through an authorized platform up to € 5, 000; Equity crowdfunding is subject to self-regulatory rules of the Japan Securities Dealers Association; In 2014, Japan revised the Japan Financial Instruments and Exchange Act (FIEA) and crowdfunding became legal for fundraising not exceeding ¥ 100 million per issuer and the amount of funds contributed per investor to an issuer must not exceed ¥ 500, 000 per year. The regulation further governs the issues of the nature of the information via website, submission of periodical information and reporting; Latvia No specific equity crowdfunding regulation; however legislative discussion in place; Lithuania A new Law on Crowdfunding entered into force on December 1, 2016, which governs the requirements for initiation of crowdfunding activities, prudential requirements for the platform operators and lays down the conditions for raising funds through crowdfunding. Supervision is carried out by Bank of Lithuania; No specific equity crowdfunding regulation; however legislative discussion in place; Crowdfunding platform would be considered as an AIF and thus the AIFMD could apply and licensing might be required; Japan Luxembourg 28 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Country Malta Regulations No specific equity crowdfunding regulation; General securities regulation applicable; Crowdfunding platform would be considered as providing an investment service, and thus would fall under the Investment Services Act (1994); Also the AIFMD Regulation would be also applicable; On April 1, 2016, the Dutch Ministry of Finance published the new Crowdfunding decree; A platform is considered to be an investment firm and is required to obtain a Mi. FID license; In regard to prospectus exemption, the threshold has been set to € 2, 500, 000 for crowdfunding platform fundraising, provided that a prescribed warning text is included in any offering; On April 1, 2014 the regulation of crowdfunding platforms – “crowdfunding service providers” (CSP) was introduced; CSPs are required to register and may only raise maximum of NZ $2 million in any 12 month period. They are required to carry out their due diligence and provide issuers with vetted information; The supervisory authority is the Financial Markets Authority provides licenses to CSPs and oversees the market; Poland No specific equity crowdfunding regulation; Portugal General securities regulation applicable; Since August 24, 2015, the crowdfunding activity is regulated by a law no. 102/2015; The law requires the crowdfunding platforms to register with the Portuguese Securities Market Commission, which also is carrying out supervision; Platforms are responsible for providing investors with information and must comply with rules in respect of conflict of interest. The law distinguishes between non-accredited and accredited investors; Romania No specific equity crowdfunding regulation; Russia General securities regulation applicable; No specific equity crowdfunding regulation; Central Bank of Russia has initiated working group for proposal of crowdfunding regulation; Netherlands New Zealand 29 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Country Malta Regulations No specific equity crowdfunding regulation; General securities regulation applicable; Crowdfunding platform would be considered as providing an investment service, and thus would fall under the Investment Services Act (1994); Also the AIFMD Regulation would be also applicable; On April 1, 2016, the Dutch Ministry of Finance published the new Crowdfunding decree; A platform is considered to be an investment firm and is required to obtain a Mi. FID license; In regard to prospectus exemption, the threshold has been set to € 2, 500, 000 for crowdfunding platform fundraising, provided that a prescribed warning text is included in any offering; On April 1, 2014 the regulation of crowdfunding platforms – “crowdfunding service providers” (CSP) was introduced; CSPs are required to register and may only raise maximum of NZ $2 million in any 12 month period. They are required to carry out their due diligence and provide issuers with vetted information; The supervisory authority is the Financial Markets Authority provides licenses to CSPs and oversees the market; Poland No specific equity crowdfunding regulation; Portugal General securities regulation applicable; Since August 24, 2015, the crowdfunding activity is regulated by a law no. 102/2015; The law requires the crowdfunding platforms to register with the Portuguese Securities Market Commission, which also is carrying out supervision; Platforms are responsible for providing investors with information and must comply with rules in respect of conflict of interest. The law distinguishes between non-accredited and accredited investors; Romania No specific equity crowdfunding regulation; Russia General securities regulation applicable; No specific equity crowdfunding regulation; United States of America Central Bank of Russia has initiated working group for proposal of crowdfunding regulation; Crowdfunding is governed by the Jumpstart Our Business Startups Act, enacted on April 5, 2012; In 2015, the Securities and Exchange commission (SEC) adopted amendments to Regulation A to the Securities Act 1933 and in May 2016, the SEC introduced new equity crowdfunding rules; Portals have to become members of FINRA and the amounts of possible investments of accredited and non-accredited investors have been established. Netherlands New Zealand 30 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion Fraud Frequency Fraud Determinants Fraud Frequency • Based on the trust traiangle, Cumming, Hornuf, Karma, and Schweizer (2015) theorized that fraud in crowdfunding markets would be related to entrepreneur’s characteristics, their presence in the crowd, and their campaign structure on the crowdfunding platform. – To test this idea, Cumming et al. examined hundreds of thousands of rewards crowdfunding campaigns from Kickstarter and Indiegogo in many countries around the world. • It is notable that on a broad definition of fraud (including clearly fraudalent campaigns such as that of Kobe Red in section 15. 2. 2, as well as suspected fraud cases such as those where the promoter stopped communicating with the crowd), there were only 207 fraud cases. – This frequency of fraud is lower than that which is observed on public stock exchanges; Cumming, Dannhauser, and Johan (2016) report that approximatly 2. 5% of companies trading on the New York Stock Exchnage and 4. 5% of companies trading on NASDAQ experience SEC enforcement actions each year. 31 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion Fraud Frequency Fraud Determinants • Cumming, Hornuf, Karma, and Schweizer’s (2015) 4 factors: 1. The entrepreneurs‘ characteristics, – Fraudsters are typically only using crowdfunding once. 2. Social media affinity, – Fraudsters less likely on Facebook, Twitter, and Linked. In 3. Campaign funding and reward structure, – Many enticements; less likely to have photos or videos 4. Campaign description. – Poorly worded campaigns 32 Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights

Why Do We Need Crowdfunding Regulation? Fraud Cases Crowdfunding Rules What Affects Crowdfunding Fraud? Conclusion 33 • Agency Problems… Fraud happens…. Hence need regulation • Many examples of fraud consistent with agency problems in Chapter 2 • But fraud in crowdfunding (as a percent of campaigns) less frequent than that observed on NASDAQ and NYSE (as a percent of listed companies) each year (at least so far) • Some regulations are too onerous if they do not lead to anyone participating in the market (e. g. , Canada) Cumming & Johan (2019) Crowdfunding: Fundamental Cases, Facts, & Insights