Managing the Risks of Equity Crowdfunding: Lessons from China

Abstract

The Chinese experience shows that equity crowdfunding platforms fail to perform their role as neutral intermediaries in the distribution of information relating to the fundraisers in the absence of regulation. This article contends that, in the context of the Chinese market, private ordering alone will not address the extreme agency and information asymmetry problems inherent in equity crowdfunding platforms. The contractual designs adopted by numerous Chinese platforms, especially that of the syndicate contract, not only fail to address the conflicting interests but also introduce additional conflicts. Other market mechanisms such as reputation, exit and private insurance, are also insufficient to ensure investor protection. Therefore, this article proposes specific regulatory measures to enhance investor protection.

Keywords: equity crowdfunding, platforms, investor protection, China