The Promise and Perils of Crowdfunding: Between Corporate Finance and Consumer Contracts

58 Pages Posted: 13 Sep 2017 Last revised: 29 Jan 2018

John Armour

University of Oxford - Faculty of Law; University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Luca Enriques

University of Oxford Faculty of Law; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: September 11, 2017

Abstract

‘Crowdfunding’ — raising capital through large numbers of small contributions — is a burgeoning phenomenon, spurred by the internet’s capacity to reduce communication costs. Its still-evolving status is reflected in diversity of contracting practices: for example, ‘equity’ crowdfunders invest in shares, whereas ‘reward’ crowdfunders get advance units of product. These practices occupy a hinterland between existing regimes of securities regulation and consumer contract law, with no consistency of treatment. Thus consumer protection law in the UK (but not the US) imposes mandatory terms that impede risk-sharing in reward crowdfunding, whereas US (but not UK) securities law mandates expensive disclosures that hinder equity crowdfunding. This article offers a normative roadmap for the regulation of crowdfunding. We suggest that while crowdfunding poses real risks for funders, neither the classical regulatory techniques of securities or consumer law provide an effective response. At the same time, a review of rapidly-developing mechanisms in crowdfunding markets suggests they offer the potential to provide meaningful protection for funders. In light of this, a permissive regulatory approach — with a credible threat of intervention should the market fail to protect consumers — is justified.

Keywords: crowdfunding, start-up finance, securities law, distance selling

JEL Classification: K12, K22, G34

Suggested Citation

Armour, John and Enriques, Luca, The Promise and Perils of Crowdfunding: Between Corporate Finance and Consumer Contracts (September 11, 2017). ECGI - Law Working Paper No. 366/2017; Oxford Legal Studies Research Paper No. 58/2017. Available at SSRN: https://ssrn.com/abstract=3035247 or http://dx.doi.org/10.2139/ssrn.3035247

John Armour

University of Oxford - Faculty of Law ( email )

Oriel College
Oxford, OX1 4EW
United Kingdom
+44 1865 286544 (Phone)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Luca Enriques (Contact Author)

University of Oxford Faculty of Law ( email )

St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Register to save articles to
your library

Register

Paper statistics

Downloads
506
rank
50,097
Abstract Views
1,169
PlumX