Developing a policy framework for emerging Crowdfunding Ecosystems
Crowdfunding is a concept that refers to an open call for finances, often for innovative or unique projects and campaigns. Crowdfunding platforms act as intermediators between supporter and project, investor and investee, or lender and lendee. The platforms intermediate this process by arranging the payment process between the parties. This brief outlines the benefits of crowdfunding for improving access to financing for small and medium enterprises, and offers policy recommendations for countries that aim to encourage the growth of their crowdfunding ecosystem.
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Building on previous research, this brief proposes the following classifications:
- Seed Stage Crowdfunding Ecosystem
- Growth Stage Crowdfunding Ecosystem
- Mature Stage Crowdfunding Ecosystem
Seed Stage Crowdfunding Ecosystems are not without regulatory frameworks pertaining indirectly to the operation of Crowdfunding platforms. At the most basic level, all platforms have to comply with Know-Your-Customer rules to avoid money laundering, financing of terrorism and other related activities, or fraudulent behaviour. To comply with these rules, platforms either have to identify both supporters and projects, or cooperate with a financial institution. In Growth Stage Crowdfunding Ecosystems, the status of Crowdfunding platforms is addressed in the Capital Markets Regime, sometimes eliminating the need to cooperate with a licensed financial service provider regime, sometimes specifying regulation regarding the protection of investors and the avoidance of conflict of interest between platform and investor. In Mature Stage Crowdfunding Ecosystems, the bespoke Crowdfunding regime, a specific legal status is introduced for platforms or Crowdfunding Service providers. The specific legal status is developed for mostly equity-based and lending-based Crowdfunding platforms and introduces rights and duties of the platforms, often coupling the specific status of these platforms with exemptions for digital management of the investor relationship. For instance, in the European Union, the licence to provide Crowdfunding services across border is coupled with a more flexible obligation with regards to investor information and withdrawing the obligation to issue a so-called prospectus about the project.
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