1. Overview of Crowdfunding

“Crowdfunding” is a form of a alternative financial system. Start-ups or venture companies can raise money from a large number of individuals via crowdfunding platforms such as funding-portal or online-broker. These systems consist of three components: (1) a proponent of the project or campaign, who needs money to complete a project, (2) bakers, who support or invest in the project, and (3) an online broker or a funding-portal, which links between bakers and companies. Above all, Kickstarter and IndieGoGo are the most popular crowdfunding platforms in USA and tumblbug or ucanstart are famous in Korea. Recently, the Crowdfunding is growing more and more due to the development of the Internet and Social Network Services.
The crowdfunding is generally classified into four types, so called a equity-based, a lending-based, a donation-based, and a reward-based crowdfunding.
Equity-based crowdfunding is a new form of issuance of securities. Individual can invest in issuers, who are generally start-ups or venture companies. If the target amount of fundraising is reached, the crowdfunding platform gives the money to the issuer.
Lending-based crowdfunding is also as known as P2P(peer to peer)―lending or social lending. This type of crowdfunding allows funders to lend money to fundraisers through a crowd-lending platform.
Donation-based crowdfunding means that people send money to people or organizations with no reward for their money. This type of fundraising is used to support personal or social project.
Reward-based crowdfunding refers to the type of fundraising that receiving non-financial reward instead of contribution. This type of crowdfunding is used to support art for the development of new products or technologies. Non-financial rewards are, for example, an autograph of the artist, mentioning name in ending-credits of movie, figure-art or ticket. On the other hand, funders can purchase a product developed through the project.
Various legislations and administrative rules are enacted or amended in many countries to promote the positive function of the crowdfunding system and regulate the side effects. [The Jumpstart Our Business Startups Act (JOBS Act)] of the United States, [Financial Services and Markets Act] of United Kingdom, and [the Small Investor Protection Act (Kleinanlegerschutzgesetz)] as well as [the Capital Investment Act (Vermögensanlagengesetz)] of Germany are examples of those regulations.
In Korea, there are acts or decree to regulate crowdfunding, and here are representative laws; [the financial Investment Services and Capital Markets Act] for the equity-based crowdfunding, [the Act on Registration of Credit Business, etc. and Protection of Finance Users] and its enforcement Decree for the lending-based crowdfunding, [Act on Collection and Use of Donation] for the donation-based crowdfunding, and [Act on the Consumer Protection in Electronic Commerce, etc.] for the reward-based crowdfunding. In particular, funding platforms shall comply with the regulations of the relevant laws and decree.
However, there are some limitations and problems with these statutes in regulating crowdfunding, because the statutes are not legislated to control of crowdfunding, but partially amended as occasion demands. Since the crowdfunding systems can be evolved more in the future, it is necessary to review and revise the contents of the law to solve these problems.

2. Problems of current Regulations and Countermeasures against crime using crowdfunding

a. in connection with equity-based Crowdfunding
(1) In order to promote the crowdfunding system, various exceptions are granted in [the financial Investment Services and Capital Markets Act], which makes it easier to issue of securities. On the other hand, there is the risk of exposure in the financial crimes such as increasing fraudulent crimes. In order to overcome these problems, it is necessary to publish of criminal records of the issuer of securities, major shareholder or director.
(2) First of all, an online small investment broker is punished if one carries on business activity without registration. However, the penalty has to be increased because there is a difference between penalties for the equitybased and lending-based, even though those activity has the same degree of illegality. Furthermore, it is reasonable to make a distinction between the “registration” violation and the “registration of change” violation, which are different degree of illegality.
(3) Since the use of similar names is often used as a method of fraudulent crime, it is essential to regulate this with more detail and strengthen the punishment.
(4) It seems necessary to adopt a sanction in consideration of the development of crowdfunding system. In addition, it is necessary to clarify in the act what is the content of “necessary measures” which is the cause of imposition of “fine of less than 100 million won”.
(5) The task of an online platform which make certain informations relevant to the project, is a core of a crowdfunding's success. Therefore it is reasonable that the violating these obligations must be dealt with a criminal penalty.
(6) It should be prohibited to provide information to others, and in case of violation, it is necessary to give criminal punishment. Also, whistle blower is a very important part to discover a crime committed in a professional and secret area. Therefore, a protective Provision should be introduced to reduce penalties for whistle-blowers.

b. In connection with lending-based Crowdfunding
(1) The lending-based crowdfunding is regulated indirectly through [the Act on Registration of Credit Business, etc. and Protection of Finance Users] and the Enforcement Decree of the act. Especially according to Article 2-4 of the Enforcement Decree, “[Persons specified by Presidential Decree] in Article 3 (2) 6 of the Act means persons who intend to engage in a credit business, in connection with a person who publishes online information of the following persons.” Therefore, P2P lending platform shall register its business with the Financial Services Commission. Meanwhile “P2P guidelines”, which is a voluntary restraint and therefore does not have any enforcement, have been introduced to protect investors. In order to protect investors from fraudulent crimes, it is necessary to revise guidelines continuously.
(2) It is necessary to improve the regulation of P2P-lending platforms. As described above, the unregistered platform’s activities are punished.
However, compared with the regulations on penalties for unregistered online small investment brokers, which are regulated by the financial Investment Services and Capital Markets Act, the statutory penalty of the violation, which is regulated by the Act on Registration of Credit Business, etc. and Protection of Finance Users, is relatively high. Since both acts have similar illegality, it is necessary to be subjected to the same punishment. Also, as mentioned above, violations of the 'registration' duty and the 'registration of change' obligations should be handled differently, because there is a difference in the illegal nature of the act.
Meanwhile, the platforms can not do a normal business of general lenders, but there is no punishment for violating this restriction. Therefore, the penalty of the restriction should be clearly defined in the law.
(3) From a long-term perspective, these platforms need to be regulated directly through an enactment of independent statutes or separate provisions within the Act on Registration of Credit Business, etc. and Protection of Finance Users.
(4) Since the Act controls the protection of borrowers, there are no regulations for a protection of investor. Therefore, additional regulations should be prepared to protect investors.
(5) Given the fact that P2P-lending platforms perform more than just intermediary services, they need to satisfy intensified requirements than those who perform only intermediary services. Therefore, it is considered that separate legislation should be introduced. There are actually many legislative proposals for these requirements. In some cases, there are contents that are not in balance with other laws and decrees. Thus, it should be reviewed and improved.

c. In connection with reward-based Crowdfunding
The reward-based crowdfunding is a system in which a contract between a person or company who needs money and a funder through a broker in internet. Because the goods are provided in the opposite payment, it can be considered a mail-order system which covered by the [Act on the Consumer Protection in Electronic Commerce, etc.]
However, it is difficult to apply directly to the regulations related to the mail-order for the reward-based crowdfunding. This is because there is a fundamental difference between the two in terms of deal structure, contract relationship, right of withdrawal of subion, and provision of product information.
In particular, the application of penal codes is not possible under the principle of prohibition of analogical interpretation.
Therefore, it is necessary to revise the act to cope with crimes using reward-based crowdfunding.

d. In connection with donation-based Crowdfunding
For donation-based crowdfunding, [Act on Collection and Use of Donation] may apply. Therefore, the donation-project must be registered if the amount of donation is over 10 million won. And the donation should be raised at public places, for example in Web-site of the crowdfunding platform. In addition, there is a need to comply with various regulations, such as compliance with the requirements for termination of the offer.
However, the act is not enacted in consideration of crowdfunding, so it is difficult to reflect its characteristics.
Therefore, it is necessary to clarify the purpose of the donation to define concepts, which is related to method and place of donation, to strengthen the responsibility of the crowdfunding platform, and to give supervisory rights in order to prevent being used for crime such as fraud.