Crowdfunding - IT Law Group 4 PDF

Crowdfunding Alessia Galante- 904274 Eleonora Furlan- 905529 Francesco Ferraro- 906644 Giulia De Togni- 904421 Giuseppe Giabardo- 905734 Iliyas Diisabek- 908488 Maddalena de Faveri- 905685 Matilde Dovizio- 904660 Nicolò Fusero- 905744 Klea Filipovska- 907083 H-Farm College...

Crowdfunding Alessia Galante- 904274 Eleonora Furlan- 905529 Francesco Ferraro- 906644 Giulia De Togni- 904421 Giuseppe Giabardo- 905734 Iliyas Diisabek- 908488 Maddalena de Faveri- 905685 Matilde Dovizio- 904660 Nicolò Fusero- 905744 Klea Filipovska- 907083 H-Farm College Page 1 of 15 Table of Contents 1. Introduction 3 2. Types of crowdfunding 4 2.1 Equity based 4 2.2 Lending model 4 2.3 Reward- based model 4 2.4 Donation/ social-based 4 3. Legal framework governing crowdfunding 5 3.1 Eu legislation 5 3.2 Italian legislation 6 4. Platform operators and intermediares 7 4.1 Roles and responsibility 7 4.2 Issues 7 5. Data privacy and Security 8 5.1 Collecting personal data 8 5.2 How this data is used to enhance our experience 8 5.3 Privacy and security issues 8 5.4 GDPR 9 6. Ethical and social implications 10 6.1 Crowdfunding is a solution or a ethical problem? 10 6.2 Fraud 10 6.3 Donor Rights and Platform Responsibilities in Crowdfunding 10 7. Case study 11 7.1 Financial Industry Regulatory Authority (FINRA) 11 7.2 What is the situation like in Italy? 11 8. Future Developments 12 9. Conclusion 13 10. References 14 Page 2 of 15  1. Introduction: Undestanding Crowdfunding Crowdfunding refers to the practice of raising funds for a project, business or a cause by collecting small amounts of money from a large measure of people, especially through the internet. This strategy permits people, organizations, businesses to undertake their projects or venture without having to seek traditional forms of nance through debts or investments from a few big players. Crowdfunding is typically used in new business ventures, artistic work such as lms, or books and social work, personal needs, or development of new technologies. How crowdfunding operates? The process starts when an individual or an organisation sets up a campaign on a crowdfunding site such as Kickstarter, Indiegogo, GoFundMe, or Patreon. The campaign has an accompanying write-up of the project/cause, a funding goal, and a timeline. When the campaign ends, and if the goal is reached, funds are passed to the creator of the campaign, less any fees from the platform. Page 3 of 15 fi fi 2. Types of crowdfunding 2.1 Equity-based Equity crowdfunding consists of selling a stake in your business to a number of investors in return for investment. This model allows startups and small businesses to raise capital by offering equity stakes to a broad audience (European Commission, n.d.). An example of a platform for this activity is Wefunder. 2.2 Lending model (peer-to-peer lending) This model allows companies to borrow directly from many individuals ready to lend. It is an alternative to traditional bank loans, providing borrowers with access to funds and lenders with potential returns (European Commission, n.d.). Examples include platforms like Prosper and SoFi. 2.3 Reward-based model Contributors provide funds in exchange for a non- nancial reward, which is often the product or service being developed. This model is popular among creative projects, startups, and product launches. This form of crowdfunding allows companies to launch with orders already on the books and cash- ow secured and gathers an audience before a product launch. 2.4 Donation/social-based Individuals donate small amounts to meet the larger funding aim of a speci c charitable project while receiving no nancial or material return. It's commonly used for charitable causes, community projects, or personal campaigns. Page 4 of 15 fi fi fl fi  3. Legal framework governing crowdfunding 3.1 EU legislation The Regulation (EU) 2020/1503 on European crowdfunding service providers for business, which has applied since 10 November 2021, is the european union regulation for crowdfunding, which sets out common rules for:providing crowdfunding services, organising, authorising and supervising crowdfunding service providers; applying transparency and marketing crowdfunding services. The key points are here reported: 1. Authorization and professionalism: Crowdfunding service providers (CSPs) must be of cially authorised by relevant regulatory authorities. Moreover, a CSP shall always conduct business with honesty, equity, and professionalism by acting in the best interest of the client. 2. Con ict of interest: Providers cannot receive any form of compensation or inducement for directing investors to speci c crowdfunding offerings, this will avoid con icts of interest. CSPs shall not invest in crowdfunding projects offered through their respective web portals. 3. Diligence and transparency: CSPs should do the necessary checks with regard to who the project owners are themselves, and ensure that at least a minimum amount of due diligence is conducted prior to allowing a project to crowd-fund on their platform. In addition, CSPs shall implement effective processes to respond to complaints made by customers in a manner that is transparent, fair, and predictable. 4. Risk management and outsourcing:There should be reasonable measures taken by the CSPs to reduce risks with respect to outsourcing services or functions from third-party providers. Prudential Safeguards shall implement the necessary arrangements to safeguard the integrity of the crowdfunding process and safety of investor funds. 5. Reporting and record keeping: CSPs shall submit annually a con dential report to national authorities listing the projects nanced through their respective platforms. CSPs shall retain records of all services and transactions provided for at least 5 years, ensuring accountability through oversight. It is important to remember that this document is an EU regulation, which is a legally binding act that must be applied to all EU member states. However, each EU state might have a set of rules and regulations apart from this legal document. As a consequence, crowdfunding companies must consider both the EU and the national regulations. Page 5 of 15 fl fl fi fi fi fi 3.2 Italian legislation Italian crowdfunding legislation is primarily governed by the Crowdfunding Regulation (EU) 2020/1503, which is complemented by the CONSOB (Italian Securities and Exchange Commission) and the TUF (Testo Unico della Finanza) rules, which supervise the operation of crowdfunding platforms and protect investors. The following are the most recent articles of the TUF about crowdfunding in Italy: - Art. 1, c. 5-novies: It de nes equity crowdfunding portal as an online site where small businesses (SMEs) or social enterprises raise money from investors against shares or stakes in their company.The main goal is to make small enterprises obtain resources from non-professional people. - Art. 50-quinquies: The crowdfunding portal managers, who are the people who run these campaigns, must be authorised and registered with CONSOB; and must agree stringent regulations with the view of protecting the investors against information asymmetry as well as offering them the fairest deal: they should not operate any other nancial activity such as collecting, transferring and managing funds received or holding the funds themselves. - Art. 100-ter: It controls the Public Tender Offer (PTO) regime, which is applied when an entity acquires a controlling stake in a listed company. Under these circumstances, the acquiring party must then launch a public offer to purchase the remaining shares of the company, ensuring that the interests of the minority shareholders are protected. This law sets out criteria for deciding the threshold of control, the price for the tender offer, how the offer must be communicated, and sanctions in the event of non-compliance. Page 6 of 15 fi fi 4. Platform operators and intermediaries 4.1 Roles and responsibility Since the functions of crowd founding revolves around money, the platforms that offer this type of investment must request an authorization at the sovereign state they are located in to, they must also clarify and be transparent about analisis politics, evaluation, section of project chosen in the platform, they also need to provide easy methods that allows to exit the investment. 4.2 Issues As liabilities platforms may face investment failure, which is not uncommon, but experienced investors may have the knowledge to successfully manage their investment. Fraud in the other hand is quite rare, but may happen with shady business collecting money for fraudulent activities furthermore you can encounter nancial fraud, payment fraud and investment fraud. Fraud can be minimised by investing in past activities, compulsory audit, raise awareness using authorised platforms and fraud monitoring, but the topic of fraud will be addressed in chapter 6. Page 7 of 15 fi  5. Data privacy and security 5. 1 Collecting Personal Data When it’s your rst time participating or creating an account in a crowdfunding platform, you ll out particulars such as name, email, phone number or in some cases the date of birth. If you make a nancial donation or initiate a campaign, further monetary information is obtained. Data is obtained through: Behavioral Data Tracking: Platforms track the sites that you’ve accessed before and the projects you have tried to know your interest and improve recommendations. Social Media Integration: When you authorise social networks, the platforms can nd publicly available data such as your photo and what you are doing. Cookies and Tracking Technologies: These monitor your online activities so that it can identify and enhance what you see the next time you are on the platform. Involvement of Third Parties: Organisations that process payments maintain your information for safety reasons, and marketing rms may also have your information for their promotional objectives. 5.2 How this data is used to enhance our experience Your data however enables the platform to enhance your experience in the future through: Personalised Recommendations: You get various recommendations of platforms that suit your needs. Enhanced User Engagement: Our activity helps the platform identify what content resonates most with us and create a more engaging experience. Streamlined Payment Processes: You don’t have to enter your credit card information after every donation you make thanks to stored credit card details. Customised Communication: You will receive messages about the new products and special offers that may be of interest to you. Improved Platform Features: Surveys and usage show what’s wrong with the platform and how it can develop in the future. 5.3 Privacy and Security Issues Surveillance Risks: The use of AI technologies to analyse vast amounts of data can lead to pervasive surveillance, where platforms closely monitor user behaviour without adequate transparency. Privacy Violations: The lack of proper controls often results in unauthorised sales of personal information to third parties, contributing to a black market for data. Information Asymmetry: Users are not always aware of what data is being collected or how it is used, creating a signi cant imbalance between platforms and their users. Page 8 of 15 fi fi fi fi fi fi 5.4 GDPR The General Data Protection Regulation (GDPR) is a European Union law protecting the personal data and privacy of EU citizens. It applies globally to organisations handling EU residents' data, ensuring transparency, individual control, and stringent security. Platforms must secure user data through: Explicit Consent: Users must agree clearly to data collection. Transparency: Requires clear privacy notices. Data Minimization: Limits data collection to essential information. Security: Mandates encryption and breach noti cation. Accountability: Obligates organisations to document compliance and appoint a Data Protection Of cer (DPO) if necessary. Page 9 of 15 fi fi 6. Ethical and social implications 6. 1 Crowdfunding is a solution or a ethical problem? Crowdfunding, born as a democratic method of fundraising, allows anyone with a good idea to seek nancial support without resorting to traditional banks or venture capital. This system promotes accessibility and broad participation, fostering innovation and also giving voice to social, political and environmental initiatives. However, ethical challenges are emerging: campaigns from less developed countries face dif culties in raising funds due to prejudice and low visibility compared to those from more advanced regions. Moreover, mass-based decisions, often based on incomplete information, can lead to irrational choices that are potentially harmful to minorities or vulnerable people. 6.2 Fraud Crowdfunding requires an ethical balance between truthfulness and transparency. Fraud can occur when sponsors deceive donors, violating the principles of transparency and fairness. For example, the Kantian ethical approach in this context requires that the information provided is universal and truthful. Other ethical currents, like utilitarianism and the ethics of virtue, emphasize the importance of actions that maximize collective well-being and transparency. Regulator s are a government authority responsible for the creation of crowdfunding laws, with the aim of protecting investors. The Federal Trade Commission (FTC) in the USA is responsible for protecting consumers from misleading campaigns by taking action against unfair practices. Then there is the Securities and Exchange Commission (SEC), which regulates equity crowdfunding to ensure transparency and limit risks for investors. 6.3 Donor Rights and Platform Responsibilities in Crowdfunding Donors have many rights. They can rely on certain protections offered by the platforms, such as fraud detection systems and refund mechanisms. However, they must also be careful to assess the reliability of the promoter and the feasibility of the project, as some campaigns offer unrealistic promises. Platforms, while not legally responsible for the actions of creators, play an important role in preventing scams. They are required to register with the SEC and to ensure transparency and security. Best practices for platforms include rigorous audits, use of anti-fraud technologies and collaboration with authorities to report suspicious campaigns, helping to maintain a reliable crowdfunding ecosystem. Page 10 of 15 fi fi 7. Case study 7.1 Financial Industry Regulatory Authority (FINRA) In 2022 it assessed nes totaling $1.75 million combined against Wefunder Portal LLC and StartEngine Capital LLC for violations in crowdfunding in the United States. In 39 cases, Wefunder allowed issuers to exceed the limit set by Regulation Crowdfunding by $20 million, thus enabling such sales of securities that exceeded the available exemptions from registration requirements and failure to return funds to investors when required. In its turn, StartEngine was ned for displaying false information on its website and for offering false investment tracking tools. These violations have brought into limelight the compliance aspects in crowdfunding for effective protection of investors' interests and market integrity. 7.2 What is the situation like in Italy? Similar protective actions were taken in Italy from 2019. The country's securities regulatory agency, CONSOB, has shut down 970 sites (as of November 2023) that are illegally operating, offering nancial services without the necessary authorizations. The "decreto crescita" (growth decree) will probably lead Internet service providers to limit access to unregulated nancial websites, blocking unauthorised investment offers. In fact, this proves the strong dedication of Italy to the integrity of the markets in which the authorities do activity aimed at reducing risks for investors by denying access to those sites that do not follow the rulings of the Italian nancial system. The models of the United States and Italy underline the requirement felt by many for strong supervision in this fast-growing eld of digital crowdfunding and nancial services. Page 11 of 15 fi fi fi fi fi fi fi 8. Future developments Future crowdfunding developments are likely to focus on technological advancements, changing regulatory issues, and changing investor priorities. The integration of blockchain technology is very likely to be one of the main focuses, offering even more transparency and security. Blockchain provides a base for tracking and veri cation of different types of transactions, which can make the process more trustworthy for investors and thus further minimize the risks associated with crowdfunding. Another transformative force is arti cial intelligence. AI-enabled platforms can re ne campaign strategies by analysing user behaviour and optimizing the content to garner more engagement, allowing the fundraisers to have a higher success rate. As crowdfunding markets continue to grow, regulatory oversight will also continue to rise in order to better protect investors. New regulatory frameworks will emerge, stemming from joint collaborations between platforms and regulators that promote standard guidelines and stability within the crowdfunding ecosystem. Furthermore, crowdfunding may also stretch into new areas in harmony with emerging investor trends, including real estate and green energy. This would increase the portfolio of projects out for support and, therefore, position crowdfunding to answer a wide range of needs-socially and economically. Page 12 of 15 fi fi fi  9. Conclusion Crowdfunding is one of the important ways in which individuals and organizations can raise capital for a project without resorting to traditional nancing. The main types of crowdfunding include equity-based, lending, reward-based, and donation- based, all with different needs for funding and with diverse legal and operational frameworks. The legal landscape of the European Union is de ned by Regulation (EU) 2020/1503, under which crowdfunding platforms should be authorized and transparent, observing speci c standards for investor protection. Italy has, through CONSOB and the TUF, additional requirements imposed on crowdfunding platforms with regard to transparency, investor protection, and compliance with the law. The U.S. has a similar framework under Regulation Crowdfunding (Reg CF), including provisions for investor protections, prevention of fraud, and state-speci c laws. Platform operators themselves must undertake particular duties in relation to due diligence, transparency, and compliance with data protection rules such as GDPR. While these safeguards are in place, risks of fraud and data privacy violations do remain, and ethical questions about accessibility and transparency will continue to demand attention. Recommendations: To navigate the legal complexities of crowdfunding, policymakers should continue re ning regulations to ensure investor protection while fostering innovation. Speci c recommendations include: - Stronger cross-border cooperation, to harmonize crowdfunding regulations globally, ensuring consistency across platforms and protecting international investors. - Give more transparency measures, so the crowdfunding platform provides clearer information on the risks of projects and due diligence measures taken. - Strong data-protection and fraud-prevention systems, with special emphasis on technologies such as AI in monitoring activities for complete GDPR compliance. - A lot of campaigns on user education and awareness in order to make contributors informed, reducing the chances of being deluded by fraudulent projects. - Strengthen penalties against non-compliance, in order to deter illegal activities and ensure that the platforms uphold the highest ethical standards. With such regulatory measures in place, crowdfunding will continue to be the democratic and innovative way of fundraising, balancing growth with accountability and security. Page 13 of 15 fi fi fi fi fi fi  10. References Crowd funding insights (no date) Crowd Funding Insights. Available at: https:// crowdfundinginsights.com/ (Accessed: November 19, 2024). Crowdfunding explained (no date) Internal Market, Industry, Entrepreneurship and SMEs. Available at: https://single-market-economy.ec.europa.eu/access- nance/guide- crowdfunding/what-crowdfunding/crowdfunding-explained_en (Accessed: November 19, 2024). Crowdfunding: Fraud and money laundering risks (2020) Sanctionscanner.com. Available at: https://www.sanctionscanner.com/blog/crowdfunding-fraud-and-money-laundering- risks-139 (Accessed: November 19, 2024). Dhameja, K. (2024) AI in regulatory compliance: Streamlining Processes and reducing risk, MarTech Munch. 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