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NEW YORK (Thomson Reuters Regulatory Intelligence) - Regulators looking for ways to spur the growth of crowdfunding with appropriate rules that provide safeguards and transparency in the emerging marketplace could potentially benefit from use of social media as a way to bring entrepreneurs and investors together.
Acting SEC Chairman Mike Piwowar said at a Securities and Exchange Commission conference on crowdfunding that the agency should consider whether existing “rules are too restrictive or too burdensome” for crowdfunding to develop.
Douglas Cumming, professor of finance at Toronto’s York University Schulich School of Business, presented a study that suggested that a key to regulating the emerging market could be to focus on the kind of regulation, instead of just easing the number of rules.
His study found that platforms that offer due diligence to screen equity offerings perform better than those that simply provide the technology for buyers and sellers to interact. It also found that for the small startups, social media provides the critical information that the platforms need.
The study suggests that regulators can also look to social media to provide red flags for signs of possible fraud, and to assist in due diligence. The study examined all crowdfunding fraud cases in nine countries from 2010 to 2015 that showed those with high visibility in social media were less likely to be involved in fraud.
“A Facebook presence reduces the likelihood of commission of a fraud by over 50 percent Each additional link to other social media pages on the Internet reduces the probability of commission of a fraud by over 30 percent,” the study reported.
Higher visibility on social networks indicates the level of interaction in a community, which shows companies engaged in legitimate activities, and also a feedback mechanism for undesirable business practices to be reported.
Equity issues have always depended on giving investors enough information to understand what they are buying. Hot companies with huge potential like Snapchat, which launched as a $35 billion company this week, are nurtured through years of development with funding and advice from venture capitalists.
But the number of share issues has fallen over the past decade, as few companies can draw the attention of the tight knit funding community that provides funding and expertise to create the next Facebook or Google. “Social media creates those kind of communities of interest,” Cumming said.
The role of the regulator in overseeing crowdfunding platforms should be to foster transparency and the role that social media plays in fostering fair valuations in determining the value of enterprises whose shares are offered.
“The SEC is doing a very good job of using empirical evidence to regulate crowdfunding,” said Cumming, who presented some of his findings at the SEC event, in an interview.
The SEC last year launched a regulatory framework that showed growth, as 156 companies did 163 deals since the SEC's new crowdfunding rules went into effect last spring. The combined total of offerings was just $10 million. The crowdfunding rules permit retail investors to be solicited to purchase unregistered securities of small private companies. The agency has registered 21 crowdfunding platforms under the rules issued last year.
- Douglas Cumming, York University Schulich School of Business, Social Media study: here
(Richard Satran is a financial journalist covering daily and emerging issues for Thomson Reuters Regulatory Intelligence.)
This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Mar. 3. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters