Reading between the lines: legal risk mitigation by equity crowdfunding platforms

Abstract

The use of equity crowdfunding as a source of financing has rapidly gained traction. The key motivation of funders on such equity crowdfunding platforms (ECPs) is high financial returns, which is also associated with greater risk for all stakeholders: creators, funders and ECPs. We explore legal risk mitigation by ECPs in this paper and develop a taxonomy of legally mitigated risks. Content analysis of Terms of Service and Privacy Policy contracts of 17 most popular ECPs each, results in 544 references of legally mitigated risks and a taxonomy of 12 first level items and 18 second level items. We find that platforms fear and mitigate for risks associated with Information Security and Third Party most. The importance attached to Third Party risks is especially interesting. This theory and experience based systematic and comprehensive taxonomy of legally mitigated risks would not only help users understand a rapidly evolving phenomenon but also will help regulators monitor compliance issues.