Demand-driven securities regulation: evidence from crowdfunding

We study the law production race-to-the-bottom/race-to-the-top debate in a unique context of crowdfunding in which potential agency problems are extreme. Our empirical setting is based on survey data from Canada in 2013 Q1 when equity crowdfunding was not permitted but was openly contemplated by regulators. The data show some tension towards a race to the bottom insofar as start-ups prefer fewer restrictions on their ability to crowdfund, and portals prefer fewer disclosure requirements and fewer restrictions on free trading of crowdfunded shares. However, this evidence is tempered by the fact that investors demand more disclosure, limits on amounts entrepreneurs can raise, and lower thresholds for audited financial statements, among other things. Based on the ease with which the Internet facilitates cross-jurisdictional investment, we infer from the data that investor demands will give rise to a race to the top in the crowdfunding space.