Minimizing risks and balancing parties' interests in equity crowdfunding: a study on the regulations in the USA, the EU and Thailand

Equity crowdfunding provides a high-potential alternative source of funding for businesses. Nevertheless, it embodies equally high risks from its unique characteristics that allow small private companies and retail investors to participate. This study deals with three main risks inherent in equity-crowdfunding system, which are the risks of information asymmetry, fraud, and illiquidity. Although these risks are common in all forms of business financing, they are more severe in equity crowdfunding, necessitating robust investor protection provisions. However, just because a particular equity-crowdfunding regulation provides measures protecting investors against the risks inherent in equity crowdfunding, it does not mean that the regulation is efficient. Scholars and regulators have widely accepted that equity-crowdfunding regulation should equally promote the interest of the issuers, which is capital formation, and the interest of the investors, which is investor protection. Then, the balance between capital formation and investor protection must be struck in every equity-crowdfunding regulation. Through the comparative analysis of the current equity-crowdfunding regimes in the USA, the EU, and Thailand, this study examines whether the current equity-crowdfunding regime in Thailand can minimize the risks of information asymmetry, fraud, as well as illiquidity and whether the regime can strike a reasonable balance between capital formation and investor protection. It was found that, apart from the well-crafted regulatory measures to address the risk of fraud, Thai equity-crowdfunding regime can neither minimize the risk of information asymmetry nor the risk of illiquidity. That is primarily because, though the requirement for issuer’s information disclosure is the most important measure to reduce information asymmetry, Thai regime allows the issuer’s information to be disclosed based on the issuer’s self-declaration and the agreement with funding portal. Although the framework facilitates capital formation by reducing the issuer’s disclosure-related costs, it exposes the investors to the risk of information asymmetry as the standards for the issuer’s information disclosure adopted by different portal will be, more or less, different. Furthermore, since Thai regulatory regime is silent on matters regarding the resale of crowdfunded securities and since there is no other alternative exit opportunity available for crowdfunding investors in Thailand besides the OTC market and regular share transfer, the risk of illiquidity then can hardly be minimized. Besides, the comparative analysis conducted in this study demonstrates that Thai equity-crowdfunding regime cannot strike a balance between capital formation and investor protection. In fact, it prioritizes issuer’s capital formation over investor protection against the risks of information asymmetry and fraud. Therefore, to achieve optimal balance, this study proposes a reform to the framework for the issuer’s information disclosure to strengthen investor protection against the risk of information asymmetry. Also, there should be a legalization of the bulletin board as the secondary trading venue especially for crowdfunded securities to minimize the risk of illiquidity currently faced by the investors in Thai equity-crowdfunding system.