Researchers and academics convened in Utrecht for the second European Alternative Finance Research conference, excited at the prospect that a network for future gatherings could receive support from the European Co-operation in Science & Technology programme.
My own address — shared in the schedule with a presentation from the European Commission — was focused on the evolution of the regulatory regime for peer-to-peer lending in the United Kingdom, and, in particular, the current proposals contained in the Financial Conduct Authority (FCA)’s post-implementation review of crowdfunding regulation. Ensuring that the prospects for retail participation in peer-to-peer lending is enhanced by a rigorous regime for platform disclosures, particularly with the prospect of a broadening investor base is a priority. The Commission’s willingness to prioritise market innovation and development ahead of prescriptive regulation is reflected in the approach adopted in the United Kingdom.
Professor Nir Vulkan of the Said Business School at the University of Oxford, considered whether equity crowdfunding remains a good idea. Tracing the history of crowdfunding back to the dotcom era of the early 2000s (with venture capital moving ‘up the supply chain’) creating a struggle for start-up entrepreneurs to access vital capital of the magnitude of around £150k. Post-2007, the FCA’s instinctive reluctance to let retailers be exposed to the risks of small, start-up enterprise investment was relaxed on the basis of self-certification, which broadened the potential investor base for these early-stage businesses: democratising access to capital and mitigating market frictions. Professor Vulkan considers it too soon to draw definitive conclusions about the sector, but reported on his research on retail investor ‘herding’ behaviour; the increasing entanglement of venture capital and angel investors in crowdfunding (with thirty-six per cent of angel investors using equity crowdfunding); and fresh insights into fundraising strategies.
Ana Odorovic’s paper on whether regulators should mandate disclosure requirements in equity crowdfunding found that a social/market optimality would arise where the net benefits of additional disclosure equalled the marginal cost of the same (which would be less than that sought by investors, but exceed that preferred by a platform). However, a disclosure regime would not overcome the challenge of adverse selection, and would not improve the result due to the costs of processing the information and the co-ordination failure of investors. Indeed, mandatory disclosure might prevent some firms from participating in the market and serve further to aggravate information asymmetry. The discussion focused on the role of quality signalling in platforms approaching the market.
A discussion on Wanxiang Cai’s paper explored whether the role of social capital was the same in crowdfunding as in other forms of entrepreneurial finance, given the prevalence of strangers, its online and typically distant engagement. The researcher’s narrative of evolution from the crowd to a virtual community of investors raised questions as to the extent to which a crowdfunding ‘community’ of individual investors’ exists — albeit that there is the potential for it to develop.
A presentation from Professor Gianfranco Gianfrate of Harvard University examined risks and returns in peer-to-peer lending, looking at 68 European platforms and 4,130 peer-to-peer business loans over the period from 2012 to 2017. Professor Gianfrate’s analysis arrived at the counter-intuitive conclusion that risk was inversely related to returns, and he argued for further regulation of the sector. Other delegates suggested that these findings warranted further exploration and explanation.