September 26th, 2018
New Crowdfunding Research Paper Shows Evidence of Demand Driven Securities Regulation
A new paper published by York University's entrepreneurship and finance professor Douglas Cumming highlights evidence that the 'crowd' is demanding a framework from regulators.
NCFA Canada’s innovation and research advisor, Douglas Cumming, has conducted a series of regression analyses to gain insight and better understand Canadian attitudes towards crowdfunding. In his most recent paper, Demand Driven Securities Regulation: Evidence from Crowdfunding, Mr. Cumming explores the race-to-the-top and race-to-the-bottom debate in a unique context of equity crowdfunding, in which agency problems are extreme.
Currently, equity crowdfunding (investment crowdfunding or crowdfund investing) is not legal yet in Canada, although there have been certain exemptions granted to portals who serve accredited investors as well as exemption proposals from other organizations. Unlike other forms of crowdfunding such as the donations/rewards models or lending models, equity crowdfunding involves a financial investment component that could pose many potential problems with securities regulations, ownership structure, and investor protection.
Investing in startups is inherently risky due to the lack of accurate valuations, sparse financial statements, and general lack of performance track records. Mr. Cumming's research leads to interesting findings in differences of opinion between various stakeholder groups and regions across Canada, suggesting that further research into other jurisdictions that are contemplating the introduction of crowdfunding legislation is warranted.
Much of the research was based on survey results from the National Crowdfunding Survey in Canada, a cross-country survey conducted in January and February of 2013 that NCFA Canada partnered with the Exempt Market Association of Canada (EMDA) to host. The objective was to gain a better understanding of the various stakeholder opinions on legalizing equity crowdfunding in Canada and provide Canadian securities regulators with feedback on many of the challenges and issuers put forth by the equity crowdfunding frameworks proposed by the OSC and CSA.