The Changing Regulation of Equity Crowdfunding in Taiwan: A Comparative and Public Choice Approach. Chang-hsien Tsai. Abstract

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1 Forthcoming in Boston University International Law Journal volume 34: issue 2. The Changing Regulation of Equity Crowdfunding in Taiwan: A Comparative and Public Choice Approach Chang-hsien Tsai Abstract Crowdfunding has caused a revolution in start-up financing during the recent years worldwide. As a matter of fact, equity-based crowdfunding ( EC ) has still been highly regulated in Taiwan. On the other hand, EC was authorized under Title III of the JOBS Act in the United States (the so-called CROWDFUND Act ) in Notably in January 2014, Taiwan s government created Go Incubation Board for Startup and Acceleration (GISA), a government-sanctioned public EC platform run by a government-controlled foundation, the GreTai Securities Market (GTSM). Another breakthrough in Taiwan s crowdfunding regulatory pattern in the end of April 2015 was the authorization of private portals to administer EC by promulgating the Private Portal Regulations, aside from the GISA board. This paper examines the perspectives of market actors on legal issues regarding EC and especially GISA in Taiwan. The data collected are interviews with the Taiwanese players in the EC marketplace. Although the stipulation of the GISA Regulations and its sibling, Private Portal Regulations, are legal transplantation of the CROWDFUND Act, a regulatory convergence towards the new tendency of U.S. securities laws to legalize EC, Taiwan s legal adaption or innovation reflects its path dependence of a high level of investor protection underlying local securities regulation. In terms of regulatory goals, both the aforementioned Regulations emphasize much more on investor protection but less on capital formation whereas the latter is mainly focused by the JOBS Act. Through a public choice lens, the resultant features of legal transplantation of both the said Regulations could be attributed to factors that there may be lobbying and influence by groups of vested interest such as incumbent securities firms to create entry barriers for potential private EC platforms and that GTSM s incentive to run the GISA system, due to its dominant government presence, is different from those of Associate Professor, Institute of Law for Science and Technology, National Tsing Hua University, Taiwan. LL.B., LL.M., National Taiwan University; LL.M. in Corporate Law, New York University; J.S.D., University of Illinois at Urbana-Champaign. Member, Taiwan & New York Bars. I am grateful to the Ministry of Science and Technology of Taiwan for financial support (grant no: MOST H ). Thanks also go to Kuan-Jun Peng for excellent research assistance. The standard disclaimers apply. 1

2 private funding portals. What might be as perplexing is that GTSM is the very regulator stipulating and enforcing Private Portal Regulations while getting into competition with the regulated private funding portals. Therefore, both the above Regulations could cause unbearable compliance costs to start-ups, ultimately compromising the goal of small business capital formation. This paper would conclude by arguing that Taiwan s EC regulatory pattern tells us about a regulatory convergence towards the U.S. model of more form (copying the texts) but of less substance (pursuing the goal of capital formation) in practice. Keywords Equity-Based Crowdfunding, Taiwan, the JOBS Act of 2012, the CROWDFUND Act, Go Incubation Board for Startup and Acceleration (GISA), Qualitative Research, Private Portal Regulations Table of Content I. Introduction... 3 II. The Regulatory Regime of Equity Crowdfunding in the United States... 6 A. An Economic Analysis of Equity-Crowdfunding Regulation Platform Motivations Creator Motivations Funder Motivations Government Motivations... 9 B. A New Crowdfunding Exemption: Title III of the JOBS Act of An Exemption from Registration Requirements Investment Caps for Investors Resale of Crowdfunding Securities Requirements for Funding Portals III. The Legal Innovation of Equity-Crowdfunding Regulation in Taiwan: A Focus on the GISA Board A. Equity Crowdfunding in Taiwan B. Legal Issues on Regulations Governing the Go Incubation Board for Startup and Acceleration Firms ( GISA Regulations ) Types of Issuers Investment Caps Disclosure Requirements Public Integrative Counseling Mechanism

3 5. The Scope of the GISA Security Exemption Resale of GISA Securities IV. The Legal Transplantation and Legal Adaption of Equity-Crowdfunding Regulation in Taiwan: A Qualitative Analysis A. Data and Methods B. Issuer Issues Disclosure Requirements on GISA Public Integrative Counseling Mechanism on GISA Equity-Crowdfunding Regulation in the Future: Simplification of Information Disclosure C. Investor Issues Who Are the Investors? Investment Caps Resale of GISA Securities D. Government Issues How Far Are GISA Securities Exempted? A New Regulatory Philosophy of Equity Crowdfunding: Humble Regulation through Nudges E. Crowdfunding Platform Issues GISA Regulations through a Public Choice Lens The Power of Interest Groups Bureaucratic Incentives for Running GISA Equity-Crowdfunding Regulation in a Changing Landscape: Licensure of Private Funding Portals F. A Convergence of More Form but Less Substance towards the U.S. Model V. Conclusion I. Introduction Crowdfunding 1 has become a powerful mechanism for entrepreneurs and startups in particular to raise early-stage capital in recent years. 2 In fact, it has been more and more difficult for startups to raise seed capital in the United States. 3 As crowdfunding revolutionized startups access to capital, crowdfunding turned 1 As generally defined, [c]rowdfunding is essentially a tool that gives entrepreneurs the opportunity to attract a pool of people via social media or shared interest in order to contribute to a funding target that has been previously established by the entrepreneur. Tanya Prive, Inside The JOBS Act: Equity Crowdfunding, FORBES (Nov. 6, 2012 AM11:57), 2 Gary Dushnitsky & Dan Marom, Crowd Monogamy, 24 BUS. STRATEGY REV. 24, 24 (2013). 3 See Prive, supra note 1. 3

4 increasingly competitive with traditional funding channels such as venture capital and angel investing. 4 In April 2012, the CROWDFUND Act (short for The Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012), Title III of the JOBS Act (short for The Jumpstart Our Business Startups Act) 5, was enacted with Equity-based Crowdfunding (EC) legalized. 6 In order to reduce compliance costs for small businesses in the fundraising process, the JOBS Act focused more on capital formation than on investor protection. 7 As a matter of fact, federal securities laws have swung between the above two goals. For example, the Sarbanes-Oxley Act of 2002 (SOX) was a law that placed heavy burdens on both large and small companies. Specifically, SOX not only strengthened mandated disclosures but also turned to interfere with internal corporate governance. 8 Although the goal of SOX was to ensure the protection of investors, it neglected the importance of promoting capital formation through offering legal flexibility or avoiding excessive burdens. 9 In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) 10 exempted small issuers from Section 404(b) of SOX. 11 On the other hand, Dodd-Frank further tightened protective measures for investors, whereas the JOBS Act swung back towards the other side of the balance: promoting capital formation by small businesses Dushnitsky & Marom, supra note 2, at Jumpstart Our Business Startups Act, Pub. L. No , 126 Stat. 306 (2012). 6 There are five models of internet crowdfunding, which are differentiated by what funders receive as consideration for their money: (1) the peer-to-peer lending category, (2) the pre-purchase category, (3) the donation category, (4) the reward category, and (5) the equity category. The JOBS Act is concerned with only the fifth category, the equity model, which is the focus of this paper as well. As for a brief overview of the other four models, see John S. (Jack) Wroldsen, The Social Network and the Crowdfund Act: Zuckerberg, Saverin, and Venture Capitalists Dilution of the Crowd, 15 VAND. J. ENT. & TECH. L. 583, (2013). 7 J. Robert Brown, Jr., JOBS Act Issue: Introduction 1 (U. Denver Legal Studies Research Paper No , 2013), available at 8 Chang-Hsien Tsai, International Jurisdictional Competition under Globalization: From the U.S. Regulation of Foreign Private Issuers to Taiwan s Restrictions on Outward Investment in Mainland China, ASIAN J. L. & ECON., Vol. 2, Issue 1, Art. 5, 1, 12 (2011), available at 9 See Chang-hsien Tsai, Demand and Supply Forces in the Market for Law Interplaying through Jurisdictional Competition: Basic Theories and Cases, EAST ASIAN L.J., Vol. 1, No. 2, 1, 17, 18, 21 (2010). 10 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , 124 Stat (2010). 11 Section 404(b) of SOX requires public companies to have an independent auditor to attest to and report on management s assessment of its internal controls. Pub.L. No , 124 Stat (2010). See Stephen M. Bainbridge, The Corporate Governance Provisions of Dodd-Frank (UCLA Sch. of Law, Law-Econ. Research Paper No , 2010), available at 12 Brown, supra note 7, at 1. 4

5 Since EC was legalized under the JOBS Act, startups would raise capital through EC with costs reduced in the capital raising process thanks to the exemption from registration for offerings made on EC platforms, while investors are protected primarily by way of an investment cap. 13 As a matter of fact, it has still been highly regulated to raise capital through EC platforms in Taiwan. Notably in January 2014, Taiwan s government first established Go Incubation Board for Startup and Acceleration (GISA, GISA board or GISA system), which is an EC platform similar to those authorized under the JOBS Act. Nevertheless, the main difference between the GISA and those EC platforms legalized by the JOBS Act is that the GISA board is run by the GreTai Securities Market (GTSM), a quasi-governmental organization, not by a private entity. 14 The ostensible purpose for creating GISA is to provide a platform to support small-sized innovative companies that have not gone public 15, like those targeted by the JOBS Act. As comparative law commentators used to argue, [d]ifferent jurisdictions have different preferences and beliefs regarding the enforcement of securities law. 16 In terms of the balance of two goals of securities laws, although legal techniques such as protective caps on the total amount investors could invest in the Title III of the JOBS Act are transplanted to Regulations Governing the Go Incubation Board for Startup and Acceleration Firms (GISA Regulations), 17 GISA Regulations have the protection of investors more at their core than the JOBS Act does. 18 Although a breakthrough in Taiwan s crowdfunding regulatory pattern in the end of April 2015 was the authorization of private portals to run equity crowdfunding by 13 Id. More details of the EC Regulations in the United States will be discussed in Part II.B. 14 The GTSM (also known as Taipei Exchange, TPEx) is the foundation operating Taiwan s over-the-counter or emerging markets. In addition to the Over-the-Counter Exchange main board, GTSM created GISA in January 2014 under the support of the Financial Supervisory Commission, Taiwan s equivalent of the U.S. SEC. See GRETAI SECURITIES MARKET, (last visited Mar. 1, 2015). 15 New Fundraising Platform for Small, Innovative Enterprises to Open Next Month, FORMOSA NEWS, Dec. 25, 2013, (last visited Mar. 10, 2015). 16 Wallace Wen-Yeu Wang & Chen Jian-Lin, Reforming China s Securities Civil Actions: Lessons from PSLRA Reform in the U.S. and Government-Sanctioned Non-Profit Organization in Taiwan, 21 COLUM. J. ASIAN L. 115, 117 (2008). 17 CAI TUAN FA REN ZHONG HUA MIN GUO ZHENG QUAN GUI TAI MAI MAI ZHONG XIN CHUANG GUI BAN GUAN LI BAN FA (2015 XIU GAI) [REGULATIONS GOVERNING THE GO INCUBATION BOARD FOR STARTUPS AND ACCELERATION FIRMS (2015 REVISIONS) (TAIWAN)], art. 4 para. 1 (2015) [hereinafter GISA REGULATIONS]. 18 This paper would argue that the CROWDFUND Act is more favorable to capital formation at least when compared with Taiwanese regulations as discussed below. 5

6 promulgating the Private Portal Regulations 19, the stipulation of both the GISA Regulations and Private Portal Regulations might be owing to consideration of local market characteristics and concomitant adaptation. But through a public choice lens, the legal innovation in practice was more likely due to lobbying by interest groups like existing securities firms as well as to bureaucratic incentives to run EC by such a government-controlled organization as GTSM. What might be perplexing is that GTSM is the very regulator stipulating and enforcing Private Portal Regulations while getting into competition with the regulated privet funding portals. Therefore, both the aforementioned Regulations favor investor protection much more than the JOBS Act, the transplanted or patterned-after law, does, which may cause unbearable compliance costs to start-ups, ultimately compromising the goal of small business capital formation. This paper is organized as follows: Following the analysis of Agrawal et al. s framework 20, Part II summarizes the regulatory regime of EC in the United States, i.e., Title III of the JOBS Act. After introducing the development of crowdfunding market in Taiwan, Part III delves into GISA Regulations from a doctrinal perspective. In addition to a qualitative approach to legal issues on EC and GISA Regulations in particular by interviewing actors in Taiwan s crowdfunding market, Part IV critiques the creation of GISA and the stipulation of Private Portal Regulations in a public choice view. Part V concludes by arguing that Taiwan s regulatory convergence towards the U.S. regulation over EC turns out to be simply of more form (copying the texts) but less substance (pursuing capital formation) in practice. II. The Regulatory Regime of Equity Crowdfunding in the United States With the development of the Internet, people could make investments combined with social networks through crowdfunding. 21 This idea of investment online 19 CAI TUAN FA REN ZHONG HUA MIN GUO ZHENG QUAN GUI TAI MAI MAI ZHONG XIN ZHENG QUAN SHANG JING YING GU QUAN XING ZHI QUN ZHONG MU ZI GUAN LI BAN FA (2015 XIU GAI) [REGULATIONS GOVERNING SECURITIES FIRMS RUNNING EQUITY CROWDFUNDING (2015 REVISIONS) (TAIWAN)], art. 1 (2015) [hereinafter PRIVATE PORTAL REGULATIONS]. 20 The theoretical framework of this paper is primarily based on a study by Ajay K. Agrawal et al. in They examine the incentives and disincentives of actors in crowdfunding, finding that there are three types of market failures: adverse selection, moral hazard and collective actions. In order to solve the above market failures, they conclude that some market designs may work: reputation signaling, rules and regulations, crowd due diligence and provision point mechanism. See generally Ajay K. Agrawal, Christian Catalini & Avi Goldfarb, Some Simple Economics of Crowdfunding (NBER Working Paper Series No , 2013), available at 21 See Wroldsen, supra note 6, at (Crowdfunding has its origins in crowdsourcing, which is a type of participative online activity in which an individual, an institution, a nonprofit 6

7 originated from the idea of crowdsourcing. 22 Among the types of crowdfunding, EC is the category where people could purchase equities of or ownership interests in the business projects in which they invest. 23 However, EC could not be tapped until the JOBS Act was enacted in 2012 to relax the restrictions concerning the sale of securities. 24 Although the SEC implementation rules for the CROWDFUND Act has not been finalized, the early research on non-equity crowdfunding could, to an extent, apply in illustrating the EC characteristics. 25 A. An Economic Analysis of Equity-Crowdfunding Regulation Agrawal et al. s framework analyses incentives and disincentives for three primary actors in the crowdfunding market: platforms, creators and funders. 26 They also explain these actors main incentives and disincentives for engaging in this market. Focusing on the disincentives, they illustrate several kinds of market failure and then propose regulatory strategies to reduce disincentives and the possibility of market failure. 27 This paper mostly follow this framework of identifying major actors in the crowdfunding market to examine their motivations for engaging in activities concerning EC and then to address related legal or regulatory issues. 1. Platform Motivations Funding portals or crowdfunding platforms are for-profit business in nature, so their incentives for engaging in crowdfunding is to make profit; they aim to maximize the number and size of successful projects by attracting a large community of funders and creators as well as designing the market to attract high-quality projects, organization, or company proposes to a group of individuals... via a flexible open call, the voluntary undertaking of a task. ). 22 Thomas Lee Hazen, Crowdfunding or Fraudfunding? Social Networks and the Securities Laws Why the Specially Tailored Exemption Must be Conditioned on Meaningful Disclosure, 90 N.C. L. REV. 1735, 1736 (2012) ( Crowdfunding is the fundraising analog to crowdsourcing, which refers to mass collaboration efforts through large numbers of people, generally using social media or the Internet. ) (footnote omitted). See also Andrew A. Schwartz, Keep It Light, Chairman White: SEC Rulemaking Under the CROWDFUND Act, 66 VAND. L. REV. EN BANC 43, 47 (2013) ( Wikipedia and Yelp are among the better-known crowdsourced projects to date. ) (footnote omitted). 23 See Paul Belleflamme, Thomas Lambert & Armin Schwienbacher, Crowdfunding: Tapping The Right Crowd 4 (July 9, 2013), available at Wroldsen, supra note 6, at Id. ( In brief, Internet platforms that facilitate crowdfunding investment would likely need to register with the Commission as broker-dealers, and crowdfunded securities would either need to be registered with the Commission or fall within an exemption from registration. ). 25 Agrawal, supra note 20, at In this paper that follows, in the context of equity crowdfunding, platforms will also be called crowdfunding platforms or funding portals, while creators are named as issuers and funders as investors. 27 Agrawal et al., supra note 20, at 7. 7

8 reduce fraud, and facilitate efficient matching between ideas and capital In Taiwan, non-equity crowdfunding platforms are for-profit business as well. For example, the revenue model of the largest non-equity crowdfunding platform, flyingv, is based on a transaction fee, 8% of total funding amount, for successful projects. 29 But as discussed in Part IV.E.3, GTSM s incentive to facilitate EC on GISA is not for profit in principle. Specifically, GTSM might not focus on the innovation or creativity in a capital raising project so much but merely carry out prevailing government policies especially because it is a government-controlled foundation Creator Motivations The reasons why issuers choose EC to raise capital include: first, a lower cost of capital; second, an access to more information. 31 Nevertheless, issuers may face some disincentives in crowdfunding, and the greatest disincentive is that issuers should disclose their innovation to the public, and this disclosure may bring imitation Funder Motivations Investors engaging in crowdfunding have five incentives: first, investors in EC would get access to investment opportunities; second, investors could get new products earlier; third, to invest through crowdfunding is a chance to participate in social activities or online community; fourth, people who invest their money on a crowdfunding platforms support the idea or innovation of the project they fund in a philanthropic way; fifth, crowdfunding platforms formalize what would otherwise be informal financial contracts. 33 To be sure, investors also face several risks or disincentives in crowdfunding. For concreteness, the disincentives or risks for investors in crowdfunding are: first, issuers fail to deliver products, generate equity value or meet the milestones of projects; second, there may be frauds in crowdfunding 28 Id. at FLYINGV GROUP MEMBERS & REPORTERS OF ECONOMICS DAILY NEWS AGENCY, FLYINGV WO TING, NI ZUO DE DAO QUN ZHONG MU ZI: 30 GE CHENG GONG GE AN DE 15 GE GUAN JIAN MI JUE [SPONSORING PROJECTS ON FLYINGV CROWDFUNDING: 30 SUCCESSFUL CASES WITH 15 KEY SECRET TIPS] 43, (2014) (Taiwan) (hereinafter SPONSORING PROJECTS ON FLYINGV). The largest non-equity crowdfunding platform in Taiwan is currently flyingv. FLYINGV, (last visited Jan. 11, 2015). 30 As in the case of the Investor Protection Center (IPC) established in Taiwan to serve the function of the U.S. lawyer-driven class actions, because of the dominant government presence in IPC, the likelihood is that the potential arbitrariness of IPC s decisions are subject to possible undue influence by other government interests. See Wang & Lin, supra note 11, at Agrawal et al., supra note 20, at Id. at Id. at

9 projects; third, these early-stage projects may easily fail inherently. 34 These three risks arise due to the information asymmetry between project creators and crowdfunders, and the asymmetry problem is amplified in the case of EC. 35 We thus can understand that even if the goal of EC regulation under the JOBS Act is mainly promoting capital formation, a certain level of investor protection is still needed. This is because these two goals are complementary in a broad sense: if adequate investor protection is provided, investors would be more willing to invest and the liquidity of the market would hence be enhanced. 36 However, in examining GISA Regulations, it seems that the GISA Regulations do not strike a balance between capital formation and investor protection while focusing primarily the latter. From the perspectives of investors, GISA Regulations including the investment caps may ensure investor protection, but excessive regulation would pose obstacles to investing and supporting a project. We will discuss these obstacles in more detail in Part IV.C. 4. Government Motivations In Agrawal et al. s view, the information asymmetry problem exists in this lightly regulated capital raising environment, so there will be three issues as mentioned in Part II.A.3: issuers incompetence, fraud and inherent project risks. 37 In order to address these risks, one of the mechanisms could be used in both non-equity crowdfunding and EC is to place and enforce platform-level and government-level rules and regulations. 38 As a result, this paper regards the government as the fourth actor in the market for crowdfunding. In particular, the government plays an important role in facilitating EC because EC could only be undertaken with the government s exemptions from securities law registration requirements. Therefore, it is of significance to realize the perspectives of the competent authorities in Taiwan to compare Taiwanese rules and regulations with those laid down by the U.S. government. That is, as discussed in Part II.B below, the U.S. Securities Exchange Commission (SEC) might follow the approach of soft or libertarian paternalism to implement the CROWDFUND Act with more flexible rules 39, so as to promote small 34 Id. at Id. at 7, See Brown, supra note 7, at 1; Abraham J.B. Cable, Mad Money: Rethinking Private Placements, 71 WASH. & LEE L. REV. 2253, (2014). 37 Agrawal et al., supra note 20, at Id. at 21, Under this approach, the SEC makes efforts to shape and contain investor preferences rather than effecting preformed investor choice. Cable, supra note 36, at For a brief definition of soft or libertarian paternalism, see Cass R. Sunstein & Richard H. Thaler, Libertarian Paternalism Is Not an 9

10 business capital formation. In the case of Taiwan, even though the GTSM clearly indicate the GISA Regulations is patterned after the CROWDFUND Act 40, the practical or actual goal of the GISA Regulations may differ from the capital formation concern mainly voiced under the U.S. model, due to Taiwan government s local preferences for a quite high level of investor protection. In Part IV, we will examine the GISA Regulations based on interviews with major actors in the market for crowdfunding in Taiwan. B. A New Crowdfunding Exemption: Title III of the JOBS Act of An Exemption from Registration Requirements First of all, EC transactions are subject to a transaction exemption, provided in Section 4(a) (6) in the JOBS Act to amend the Securities Act of 1933, allowing start-up entrepreneurs to try to raise equity capital through crowdfunding. 41 Additionally, if securities offerings are exempt transactions, those securities cannot be resold unless they are registered with the SEC or other exemptions are available, while the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 are applied in principle. 42 According to the JOBS Act, the sale of securities by non-reporting companies through crowdfunding, up to $1,000,000 in a 12-month period, is exempted from the SEC registration. 43 The CROWDFUND Act not only requires non-reporting firms to make non-trivial disclosure 44, but also adopts a funding threshold to prevent issuers from taking fund from investors under some circumstances. 45 Oxymoron, 70 U. CHI. L. REV. 1159, 1162 (2003) ( Libertarian paternalism is a relatively weak and nonintrusive type of paternalism, because choices are not blocked or fenced off. ). 40 See GRETAI SECURITIES MARKET, CHUANG GUI BAN CHANG JIAN WEN TI JI SHUO MING HUI ZONG [SUMMARY OF FREQUENTLY ASKED QUESTIONS REGARDING GISA AND THEIR ANSWERS] 2 (Mar. 20, 2015), available at 41 JAMES D. COX, ROBERT WILLIAM HILLMAN & DONALD C. LANGEVOORT, SECURITIES REGULATION: CASES AND MATERIALS 249, (7th ed 2013). 42 Id. at JOHN C. COFFEE, JR & HILLARY A. SALE, SECURITIES REGULATION: CASES AND MATERIALS 385 (12th ed 2012); Lina Jasinskaite, The JOBS Act: Does the Income Cap Really Protect Investors?, 90 DENV. U. L. REV. ONLINE 81, 83 (2013), available at _Formatted.pdf; WILLIAM MICHAEL CUNNINGHAM, THE JOBS ACT: CROWDFUNDING FOR SMALL BUSINESS AND STARTUPS 5(2012). 44 COX, HILLMAN & LANGEVOORT, supra note 41, at Agrawal et al., supra note 20, at 27. From an economic perspective, this threshold is a provision point mechanism to address the market failure of coordination among investors because of the free-rider problem. As briefly defined, the creator only receives the funds if a funding threshold level is reached or surpassed within a certain period of time. Id. at 31. The CRWODFUND Act specifies the likelihood of this mechanism to be mandated, as crowdfunding intermediaries would have to ensure that all offering proceeds are only provided to the issuer when the aggregate capital 10

11 2. Investment Caps for Investors The JOBS Act introduced a regulatory technique investment caps. For investors whose annual income or net worth is less than $100,000, the annual investment cap is the greater of $2,000 or 5% of their annual income or net worth. 46 If investors have an annual income or net worth more than $100,000, they can invest 10% of such amount in crowdfunded shares, subject to a maximum aggregate amount sold of $100, Resale of Crowdfunding Securities According to the JOBS Act, investors cannot transfer or resell the crowdfunding securities within one year subsequent to the date of purchase, unless they may resell to the issuer, to an accredited investor, or to a family member of the purchaser; or the resale or transfer is part of an offering registered with the SEC Requirements for Funding Portals Since the transaction needs to be made through a government certified crowdfunding platforms, platforms have to register as a funding portal or as a broker with the SEC, as well as with self-regulatory organizations such as Financial Industry Regulatory Authority (FINRA). 49 Furthermore, besides disclosing crowdfunded security risks, funding portals have to educate investors and make sure investors affirm that they understand the level of risk in startups and small issuers and the risk of illiquidity. 50 Also portals need to make sure that investors do not invest more than the aggregate amounts he or she is allowed to purchase across all platforms. 51 III. The Legal Innovation of Equity-Crowdfunding Regulation in Taiwan: A Focus on raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the Commission shall, by rule, determine appropriate." See Section 302 of the JOBS Act (adding Section 4A (a) (7) to the Securities Act of 1933); Agrawal et al., supra note 20, at See Section 302 of the JOBS Act (adding Section 4(6) to the Securities Act of 1933). COFFEE & SALE, supra note 43, at 385; COX, HILLMAN & LANGEVOORT, supra note 41, at 312; Agrawal et al., supra note 20, at CUNNINGHAM, supra note 43, at Schwartz, supra note 22, at 49-50; COFFEE & SALE, supra note 43, at 385; COX, HILLMAN & LANGEVOORT, supra note 41, at CUNNINGHAM, supra note 43, at Id. at COX, HILLMAN & LANGEVOORT, supra note 41, at

12 the GISA Board A. Equity Crowdfunding in Taiwan In the United States, EC through private portals was legalized under the JOBS Act. As mentioned in Part IV.E.4 below, private crowdfunding platforms were not legally allowed to facilitate EC until the end of April 2015 in Taiwan. In fact, portals of non-equity crowdfunding emerged in Taiwan around in When it comes to the consideration funders pay for, to take flyingv for example, the crowdfunding projects are based on the pre-purchase model, reward model and donation model. Even though there used to be an attempt by the founder of flyingv to design an EC platform, flyingvc 53, in a private-placement form similar to the business model adopted by AngelList 54 in the United States, this plan might have been suspended due to absence of clear authorization from Taiwan s government prior to Before the authorization of private crowdfunding platforms in the end of April 2015, the only exception to the prohibition from running an EC platform was GISA, a Financial Supervisory Commission (FSC)-supported funding portal created by a quasi-governmental foundation, GTSM. 55 The rules and legal issues regarding GISA are worth study because GISA just began operation in January 2014 in Taiwan and is so unique in its public capacity when compared with all other crowdfunding portals in the world currently. In 2013, preparing for the creation of GISA is one of the main annual jobs for FSC. According to the GISA s website, the official goal of GISA is to support small-sized innovative companies and to help these potential startups raise the capital they need SPONSORING PROJECTS ON FLYINGV, supra note 29, at 26. To name a few non-equity crowdfunding platforms in Taiwan, see WEREPORT, (last visited Mar. 4, 2015); ZECZEC, (last visited Mar. 4, 2015); FLYINGV, (last visited Mar. 4, 2015); LIMITSTYLE, (last visited Mar. 4, 2015); FUUDAI, (last visited Mar. 4, 2015); HEREO, (last visited Mar. 4, 2015); VDEMOCRACY, (last visited Mar. 4, 2015). 53 Hong-Quan Lin, Xin Chuang Gong Si De Mu Zi Kun Jing (San): Tu Po Chuan Tong Mu Zi Mo Shi FLYING.VC [Startups in a Financing Predicament III: A Break-through of Traditional Financing Channels - FLYING.VC], INSIDE, (lasted visited Mar. 4, 2015). 54 ANGELLIST, (last visited July 29, 2014). 55 See Order of the Financial Supervisory Commission, Executive Yuan, Jin-Guan-Zheng-Fa-Zi No (passed on Dec. 13, 2013) (Taiwan) (hereinafter Order of Exempt Securities). FSC is basically a Taiwanese equivalent of the U.S. SEC. 56 Establishment Purpose of Go Incubation Board for Startup and Acceleration Firms (GISA), GRETAI SECURITIES MARKET, (last visited Mar. 4, 2015). 12

13 In the following Part III.B, this paper will summarize the GISA Regulations. Then Part IV will dissect legal issues concerning EC and especially GISA from the perspectives of primary actors in the market for crowdfunding in Taiwan, by comparing the U.S. regulatory regime and through a public choice lens. B. Legal Issues on Regulations Governing the Go Incubation Board for Startup and Acceleration Firms ( GISA Regulations ) 1. Types of Issuers According to Regulations Governing the Go Incubation Board for Startups and Acceleration Firms Companies (the GISA Regulations), startups have to meet the following requirements to apply for GISA registration. First, they must be companies limited by shares, limited companies, or preparatory offices for the incorporation of a company by public offering under Taiwan s Company Act. Second, in principle, The total paid-in capital or the total paid-in capital planned for the incorporation by public offering must be NT$ 50 million or less; this requirement illustrates that the GISA system targets small companies. Third, companies need to have innovative or creative concepts and future development potential. 57 Besides, the total par value of capital stock offered for subscription by investors through the GISA may not exceed NT$15 million. 58 Apparently, compared with the CROWDFUND Act, there is also a funding cap on the capital to be raised in the case of GISA shares in Taiwan. Moreover, those allowed to register on GISA board are limited to non-publicly traded companies. 2. Investment Caps Investment made by a non-professional investor through the GISA system during the preceding year may not exceed NT$150,000, but for the original shareholders of the issuer or a professional investor, the investment cap does not apply. 59 Professional investors embrace four categories: first, professional institutional investors such as a foreign or domestic bank, insurance company, securities firm, pension fund, mutual fund, unit trust, and any other institution approved by the competent authority; second, a juristic person or fund whose total assets, as stated in a CPA audited or reviewed financial report for the most recent period, are in excess of NT$50 million; third, a natural person who provides proof of financial capacity 57 GISA REGULATIONS, supra note 17, art. 4 para Id. art. 15 para Id. art. 16 para

14 showing assets of NT$30 million or more, and who also possess ample professional knowledge of financial products or ample trading experience; fourth, a trust enterprise that has entered into a trust agreement with a trustor that falls within the preceding second and third categories. 60 These regulations are summarized as in the following table: Table 1: GISA Regulations on Investors and Investment Caps Investors Definition Investment Caps professional institutional investors a juristic person or fund Juristic Person whose total assets are in excess of NT$50 million Professional Investors a trust enterprise that has entered into a trust agreement with a trustor a sophisticated natural No limitation Natural Person person who provides proof of financial capacity showing assets of NT$30 million or more Non-Professional Investors who are not professional NT$150,000 per Investors investors year Source: This Author 3. Disclosure Requirements Once startups register on the GISA board to raise capital, it has to take the obligation of disclosure. However, for the reason that the GISA company is still a 60 Id. art. 16 para

15 small business, it is not suitable for the privately-traded startup to comply with the disclosure requirements as demanding as those applied to public companies. According to the GISA Regulations, there are eight types of basic information the startup has to disclose on the GTSM-designated information reporting website 61, as well as material information required to be disclosed under twelve circumstances Public Integrative Counseling Mechanism After receiving a company s application for registration on GISA, GTSM will examine the innovation of the company, and it is the first-stage examination. After the passage of the first-stage examination, GTSM s public integrative counseling mechanism (PICM) will provide comprehensive counseling services, including accounting, internal control, marketing and regulatory counseling services, to help the private and small startup set up its internal control, accounting and corporate governance systems; basically, this counseling period should last for fewer than two years. 63 In fact, although the PICM may help a startup enhance its corporate governance, the obvious goal of this mechanism is to ensure such a high level of investor protection that the PICM might impose excessive burdens on startups albeit with GTSM s help. 61 The eight types of basic information include: 1. Basic company information; 2. Information on company insider shareholdings; 3. The dates of regular and special shareholders meetings and related issues; 4. Financial reports; 5. Dividend distribution for the current year; 6. Shareholders meeting minutes; 7. The date of record for the company's decision to distribute dividends, bonuses, or other benefits and related issues; 8. Information on a cash capital increase. Id. art. 22 para If the following twelve circumstances apply to a GISA company, the company shall disclose the related material information: 1. It has experienced a loss of creditworthiness; 2. The company has experienced any major litigious, non-litigious matter or similar legal disputes with a material effect on its finances or business; 3. The company makes a major change in its operation with a material impact on company business; 4. The sale of all or a substantial part of its business or assets; 5. Any change in its chairman or general manager; 6. The signing of a plan for business cooperation or an important contract, or any change in such a plan or contract, with a material effect on the finances or business of the company; 7. A resolution by the board of directors for a capital increase through a new share issue or the record date of a cash capital increase, or a material change in the preceding; 8. A resolution by the board of directors to file with the competent authority following supplementary procedures to register with the competent authority and to be classified as a public company; 9. A board of directors or shareholders meeting resolution to apply for termination of GISA registration; 10. In order to release the suspension of the company s qualification for capital raising through the GISA, explanation of extraordinary circumstances leading to the suspension, of how to resolve the problems, and of the subsequent improvement; 11. Suspension of the company's qualification for capital raising through the GISA; 12. Any other circumstances with a material effect on shareholder equity. Id. art. 23 para Registering on GISA and Counseling Procedures, GRETAI SECURITIES MARKET, (last visited Feb. 17, 2015). See also GISA REGULATIONS, supra note 17, art. 8, art. 9, art. 10, art. 11, art

16 5. The Scope of the GISA Security Exemption According to the FSC s order 64, GISA securities are curiously and strangely characterized as exempt securities, so as to be exempted from the registration requirement under Paragraph 1 of Article 22 of the Securities and Exchange Act (the SE Act). 65 However, if there is securities antifraud litigation involving a GISA company, which law should be applied? Here is the important question of how far GISA securities are exempted. Even though some provisions of GISA Regulations note this issue, these rules did not provide a clear answer in a strictly legal sense. 66 The SE Act should govern public companies only, but Taiwanese leading scholars assert that although GISA securities are classified as exempt securities and not publicly traded, the anti-fraud provision, Paragraph 1 of Article 20 of the SE Act, is still applied Resale of GISA Securities In addition to the question of the scope of the GISA security exemption, the resale rule for GISA securities is not clear. In theory, because GISA securities are neither publicly traded nor registered with the FSC, the transfer of GISA securities should be regulated more strictly for investor protection. However, there is a loophole in regulation because neither statutory provisions nor GISA Regulations govern the transfer of GISA securities, leading to a risk that the main goal of GISA-investor protection-may not be achieved. In U.S. securities regulation, both private offerings and EC are exempt transactions. 68 Let us take requirements on private offerings in Taiwan for instance. As to the rules governing the transfer of securities placed in private offering (private placement securities), some restrictions on the transfer of 64 Order of Exempt Securities, supra note Therefore, as discussed in Part II.B.1, the FSC s approach to exempting GISA securities is not by way of transaction exemptions as adopted by the JOBS Act. 66 Paragraph 2 of Article 22 of GISA Regulations stipulates that no misrepresentation, concealment, or information sufficient to mislead others may be contained within the 8 types of basic reported information as introduced in Part III.B.3. Meanwhile, Paragraph 3 of Article 23 of GISA Regulations states that no material information required to be reported under twelve circumstances as mentioned in Part III.B.3 may contain any descriptions of an exaggerated nature or resemble advertising or promotional language, nor may they involve misrepresentation, concealment, or misleading statements. Also, Paragraph 2 of Article 24 of GISA Regulations provides that when information reported by a GISA company contains misrepresentations, it will be handled pursuant to the relevant provisions of GISA Regulations and the GISA company will solely bear the related legal liability. 67 LEN-YU LIU, XIN ZHENG QUAN JIAO YI FA SHI LI YAN XI [MODERN SECURITIES LAW: CASES AND EXPLANATIONS] 346 (12th ed. 2014) (Taiwan); Chih-Cheng Wang, Chuang Gui Ban Yu Gong Zhong Chou Zi Fa Zhi Zhi Jian Gou (Shang) [The GISA Board and the Establishment of the Regime for Crowdfunding, Part I], 148 YUE DAN FA XUE JIAO SHI [THE TAIWAN LAW REVIEW] 33, (2015) (Taiwan). 68 COX, HILLMAN & LANGEVOORT, supra note 41, at

17 private placement securities have been imposed; for example, privately placed securities may not be resold except where three full years had elapsed since the delivery date and the privately offering company then have registered those unregistered securities with the competent authority. 69 Therefore, there should be some restrictions on the transfer of GISA securities such as the aforementioned lock-up period for transferring privately placed securities in Taiwan. IV. The Legal Transplantation and Legal Adaption of Equity-Crowdfunding Regulation in Taiwan: A Qualitative Analysis A. Data and Methods This paper will examine the legal issues from the perspectives of major market actors in EC by adopting in-depth interviews. Questions for these in-depth interviews are designed as semi-structured questions. 70 This paper employs purposive sampling as the sampling strategy. 71 This method turns on the thesis of a study and chooses the most relevant samples. 72 The data are collected by conducting in-depth face-to-face interviews with the following interviewees in Taiwan: a lawyer who are familiar with and specializes in the market for crowdfunding represents an investor in the EC market; the CEO of a startup with the experience of raising capital on GISA represents an issuer; the FSC official in charge of the EC market represents the government; the founder of a major non-equity crowdfunding platform, who used to consider creating a private EC portal, represents a private crowdfunding platform; and the manager in charge of EC business within GTSM, a government controlled foundation operating emerging securities markets, represents the public EC portal. The data and method mentioned above are summarized in Table ZHENG QUAN JIAO YI FA (2013 XIU GAI) [SECURITIES AND EXCHANGE ACT (2013 REVISIONS) (TAIWAN)] art para Semi-structured questions are a set of questions that the author predetermines, which are related to the identified specific issues; the questions may be extended, depending on the answers of the interviewees. Andrea Fontana & James Frey, Interviewing: The Art of Science, in HANDBOOK OF QUALITATIVE RESEARCH 361, 361, 373 (Norman K. Denzin & Yvonna S. Lincoln eds., 1994). 71 Methodologically speaking, qualitative research tends to focus on a smaller number of observations or data sources, There are various sampling techniques that may be employed. [T]he researcher may seek out key people or events that are likely to provide rich sources of information or data. This sampling technique is called purposeful/purposive sampling. Lisa Webley, Qualitative Approaches to Empirical Legal Research, in THE OXFORD HANDBOOK OF EMPIRICAL LEGAL RESEARCH 926, 934, 942 (Peter Cane & Herbert M. Kritzer eds., 2012). 72 ROBERT K. YIN, QUALITATIVE RESEARCH: FROM START TO FINISH 88 (2011). In simple, other commonly used sampling methods include convenience sampling, snowball sampling and random sampling. The convenience sampling is to do the sampling conveniently from all the samples available now; the snowball sampling is based on the current samples to touch other ones; and random sampling is to sample statistically from a population. Id. at

18 Table 2: The Data and Method Market Actors Samples Interviewee Portals A private crowdfunding The Date of the Interview Symbol portal whose founder used to consider creating another private EC portal A major non-equity crowdfunding platform The founder of the non-equity crowdfunding platform A GTSM, a government controlled foundation operating emerging The manager handling the EC business in this foundation B securities markets Issuers A startup with the experience of raising capital on The CEO of this startup C 18

19 GISA Investors A lawyer familiar with specializing crowdfunding Taiwan and in in The lawyer D Government FSC, the government agency regulating securities markets Source: This Author The official in charge of the EC market E As shown in the table above, each corresponding interviewee represents different major actors in the market for crowdfunding in Taiwan. Since the data gathered are confidential, we keep each interviewee anonymous by using symbols A to E to refer to the sequence of interviews. In addition, the interview codes are in the form of Xy, in which X is the capitalized symbol from A to E representing respective interviewees, and y is the number of questions posed to each interviewee and their answers for those questions. B. Issuer Issues 1. Disclosure Requirements on GISA The disclosure requirements for GISA companies include the eight basic information these companies are required to disclose and the material information they need to disclose under twelve circumstances on the GTSM-designed information reporting website. Inherently speaking, even though GISA companies publicly offer their shares as public companies do, since GISA companies are small startups and less able to assume higher regulatory burdens, the disclosure requirements should be simpler theoretically (E7, A1). In practice, these disclosure requirements are not simplified enough. On the one 19

20 hand, the basic information GISA companies have to disclose includes eight types of information; compared with the disclosure requirements for public companies, the requirements for GISA companies are simplified indeed 73, while requirements on the GTSM-designed information reporting website is simpler than those for public companies (B39). 74 On the other hand, the manager handling the EC business in GTSM observed on the surface, arguing that the material information GISA companies need to disclose under twelve circumstances (material information disclosure) are also simplified (B45), but the simplification of these rules actually are not sufficient for GISA companies if compared with those requirements for public companies. 75 That is to say, startups registering on GISA still encounter excessive burdens in abiding by these disclosure rules (C2, C10). After examining the above disclosure requirements for GISA companies, these rules are not simplified enough for startups. Although these rules are a liberalized version of the traditional mandated full-disclosure requirements, they could be simpler to realize regulatory humility. 76 In other words, humble regulation or light-touch regulations would be a more effective way to help people make better choices. 77 Furthermore, in the sense of humble regulation, the government should be a nudger, 78 and simpler disclosure is a good way to nudge Article 8 to Article 33 of Regulations Governing Information to be Published in Public Offering and Issuance Prospectuses include all the information in a prospectus prepared by a public company. GONG SI MU JI FA XING YOU JIA ZHENG QUAN GONG KAI SHUO MING SHU YING XING JI ZAI SHI XIANG (2015 XIU GAI)[REGULATIONS GOVERNING INFORMATION TO BE PUBLISHED IN PUBLIC OFFERING AND ISSUANCE PROSPECTUSES (2015 REVISIONS) (TAIWAN)] art (2015). 74 Regarding the information reporting website for GISA companies, see GRETAI SECURITIES MARKET, CHUANG GUI BAN ZI XUN GONG KAI XI TONG [MARKET OBSERVATION POST SYSTEM FOR GISA COMPANIES], (last visited Mar. 6, 2015). As to that for public companies, see TAIWAN STOCK EXCH., MARKET OBSERVATION POST SYSTEM, (last visited Feb. 16, 2015). 75 ZHENG QUAN JIAO YI FA SHI XING XI ZE (2012 XIU GAI) [SECURITIES AND EXCHANGE ACT ENFORCEMENT RULES (2012 REVISIONS) (TAIWAN)] art. 7 (2012). Also, GTSM acknowledged that the requirement for material information disclosure was designed by referring to Article 7 of Securities and Exchange Act Enforcement Rules, which are applied to publicly traded companies though. Obligations for Companies Applying for GISA Registering, GRETAI SECURITIES MARKET, s (last visited Mar. 6, 2015). 76 Specifically, humble regulation embraces lessening unnecessary regulations, lowering transaction costs, and shifting the regulatory focus from ex ante restrictions to ex post remedies. See Larry E. Ribstein, Sarbox: The Road to Nirvana, 2004 MICH. ST. L. REV. 279, (2004); Tsai Chang-hsien, Cong Fa Yu Jing Zheng Guan Dian Lun Zui Di Zi Ben Zhi Zhi Bian Qian: Jian Lun Wo Guo Mian E Zhi Zhi Ke Neng Gai Ge [A Jurisdictional Competition Perspective on Changes of Minimum Capital Requirements: With a Look at Taiwan s Probable Reforms on Par Value Rules], 42 TAI DA FA XUE LUN CONG [NAT L TAIWAN UNIV. L.J.] 553, 610 (2013). 77 See Oskari Juurikkala, The Behavioral Paradox: Why Investor Irrationality Calls for Lighter and Simpler Financial Regulation, 18 FORDHAM J. CORP. & FIN. L. 33, 51 (2012) ( [I]t is not a foregone conclusion that heavy intervention is the optimal policy. It may be that simple light-touch regulations more effectively help market participants improve their choices. ). 78 CASS R. SUNSTEIN, SIMPLER: THE FUTURE OF GOVERNMENT 9 (2013) ( Nudges consist of 20