Establishing the Legal Framework for Crowdfunding in China

Abstract

Crowdfunding is a rapidly growing means of raising capital from a large crowd of people via the internet. In the U.S., Title III of the JOBS Act exempts offerings using crowdfunding from registering with SEC. To implement the statutory exemption, SEC issued Regulation Crowdfunding (Reg CF). Reg CF imposes certain obligations on issuers, investors, and funding portals.

Now in the U.S., offerings using crowdfunding proliferate. Among all these offerings, common stock, debt, and Simple Agreement for Future Equity (SAFE) are the most-issued types of securities. Revenue sharing note becomes a marked type of debt securities. The SAFE is a convertible security that can convert into equity security, in most cases, preferred stock. It is widely used in crowdfunding offerings and has two variants. Meanwhile, it also gives rise to suspicion over its safety, and even SEC’s failed attempt to ban its use in crowdfunding offerings. However, its popularity shows no sign of decline.

In contrast, in China, crowdfunding industry used to prosper but now is dying due to regulatory clampdown. To resurrect the industry, two legal loopholes in China Securities Law (CSL) should be corrected. The first is only a modicum of securities are governed by CSL. Notes and SAFEs are outside of CSL’s reach. The second is CSL’s numeric benchmark for a public offering is neither scientific nor reasonable. But overall, the priority is to provide a statutory exemption for crowdfunding offerings in China. Reg CF and a rich body of relevant cases in the U.S. could be useful for China’s rulemaking undertakings in crowdfunding.