Crowdfunding: New to the international investment law
playground?
A study of equity crowdfunding and its risks under international investment law
.LLM. International Trade and Investment Law.
Candidate: Jazmin Sapienza St. No: 12580562 jazminsapienza@gmail.com Supervisor: Dr. Stephan W. Schill.1. Crowdfunding: a brief screening. 4
a. Concept. 4
b. Crowdfunding Framework. Who is the investor? 6
i. Backers 6
ii. Platform 7
iii. Developers 7
Classification 9
2. Parallel between traditional investment and Crowdfunding 10
a. Equity Crowdfunding 10
b. Civic Crowdfunding 11
c. Investment Methods 12
i. Pre-auction Method 12
ii. Simple Subscription 13
3. Crowdfunding risks in international investment law. 14
a. Can shares obtained through crowdfunding fulfill the territoriality requirement? 15
b. Can crowdfunding platforms fulfill the territoriality requirement? 17
i. Crowdfunding platforms as investments. 17
ii. Crowdfunding platforms and the meeting of territoriality. 18 c. Insufficient crowdfunding regulation as a breach of the full protection and
security standard. 19
i. State liability under the full protection and security standard. 21 ii. Full protection and security from private parties. 22
iii. Legal security and protection. 23
4. Regulatory Arbitration as a means to protect Crowdfunding related risk. 26
i. Intent. 27
ii. A pre-existing substantive norm. 28
iii. A rule or remedy. 29
Issues relating to novelty 29
i. Procedural Inquiries. 29
ii. Novelty as a substantive risk. 32
Conclusions: 35
Abstract.
Crowdfunding is a fastly evolving financing method in which small and medium enterprises, or start-ups, are put in contact with potential investors through a digital crowdfunding platform. It is characterized by the large number of investors who provide a modest amounts to the projects until they reach the desired capital. Without the intermediation of the crowdfunding platforms, most of the applicant projects would struggle to access other traditional forms of investors such as angel investors or bank or financial entity backing. Crowdfunding interactions are elaborated in their entirety through the internet, which has allowed international crowdfunding investments to develop at a fast pace. What would happen if a crowdfunded investment becomes unlawfully expropriated? How about if a crowdfunding platform, the bridge between projects and investors, falls to the same destiny? The present work analyzes the dynamics of modern crowdfunding and the international investment framework to resolve this enquiries.
I. Introduction
In the context of a world with fast-developing technology, where globalization keeps removing borders in constantly innovative ways and in which the possibility to invest in international projects is just one click away, it is not far-fetched to think of crowdfunding eventually meeting international investment law at some point sooner or later.
Considering the expansion of crowdfunding as a method to finance projects, it is important to consider the consequences of investors participating in crowdfunding projects in other countries and how they may be protected. Taking into account the complexity of the operation, the participation of platforms, the fact that the operation is executed digitally in almost its entirety and that each project can count with backing from modest amounts provided by a vast number of investors, there are many factors to be looked at in such a transaction.
Thus, the present research will concentrate on the way crowdfunding and international investment law interact, the dynamic between both and what effects they may have on each other. Who is the investor? what is the investment? what are the risks associated with the transcations in light of international investment law?
This work will not focus on donation crowdfunding or reward crowdfunding. Rather it will analyze the different forms of equity crowdfunding and of civic crowdfunding, and how the different ways of structuring an investment can have diverse effects in terms of international investment law.
Additionally, other elements of crowdfunding investments will be studied, such as the different investment methods, the most commonly used being the “pre-auction” method, and the “simple subscription” method, in order to identify the implications of each of them on the international investment field.
Lastly, the present study will also analyse the potential of crowdfunding claims as mass claims in arbitration fora, taking into consideration that the projects are usually funded by numerous investors who contributed small amounts through a digital setting.
1. Crowdfunding: a brief screening.
Before analyzing the challenges of crowdfunding in the context of international investment, it is important first to understand what it entails and who are the parties to the transactions involved in each crowdfunded project.
a. Concept.
Crowdfunding is defined as a process in which entrepreneurs acquire financial resources from many individuals who are interacting in online consumer communities on a specific web-based platform, in exchange for some type of reward. It is a derivative of1 crowdsourcing, as initially put by Howe , but instead of idea generation of the collective, the 2 crowd provides financial funds for another one's proposed project. 3
Crowdfunding is by no means a novel idea. Mozart and Bethoven used public subscription to finance concerts and new music compositions. The Statue of Liberty is placed upon a plinth4 funded by the citizens of New York funded through small contributions. 5
Today, the novelty of crowdfunded is embedded in the exploitation of the capabilities of social networks and other Web 2.0 features such as viral networking and marketing and the relatively short time period needed to raise funds. Technological innovation has been the key 6
element to bring forward a new era of Crowdfunding.
1 Paul Belleflamme, Thomas Lambert, Armin Schwienbacher “Crowdfunding: Tapping the right crowd”,
Journal of Business Venturing 29 (5), September 2014, 610-611.
<https://www.sciencedirect.com/science/article/abs/pii/S0883902613000694?via%3Dihub>
2 Jeff Howe, The Rise of Crowdsourcing, Wired Magazine, 6 January 2006
<https://www.wired.com/2006/06/crowds/> accessed 12 May 2020.
3Nadine Scholz, The Relevance of Crowdfunding, The Impact on the Innovation Process of Small
Entrepreneurial Firms (Springer Gabler 2015) 26.
4 David Gedda, Billy Nilsson, Zebastian Såthén & Klaus Solberg Søilen “Crowdfunding: Finding the Optimal
Platform for Funders and Entrepreneurs”, Technology Innovation Management Review 6 (3) March 2016, 31-40 <https://timreview.ca/sites/default/files/Issue_PDF/TIMReview_March2016.pdf#page=31> accessed 5 May 2020.
5The Statue of Liberty and America's crowdfunding pioneer, BBC News Magazine, 25 April 2013
<https://www.bbc.com/news/magazine-21932675> accessed 22 May 2020.
The participation of consumers in companies has increased in the last years, a participation which takes different forms, such as design and publicity. Thus, the individual who provides 7
an input for the project, be it by offering personal skills or financial resources, feels a connection to the endeavour. This dynamic of consumer involvement results in an added value for the company. 8
Therefore the main characteristic which sets apart crowdfunding from other forms of crowd participation is that contrary to crowdsourcing, were the resource in question belongs to the community, the capital provided by contributors through crowdfunding remains under the control of the company due to the fact that it cannot be shared, while while resources can be externally sourced. 9
Briefly, crowdfunding is a tool through which projects find support from the crowd by involving it in the product development and benefiting from a contribution from a financial nature or not. In turn, this process may equate to a product tailored by its own consumers, increasing the chances of acceptance from the market.
The main difference between traditional banking and financial intermediation and the intermediation provided by crowdfunding platforms is that banks or financial institutions manage a base of deposits to leverage loans they assign themselves, they make the decisions regarding the investments and loans that is most likely to benefit the client. On the other hand, in the context of crowdfunding, the investors are the decision makers. 10
When investing in a business that recurred to crowdfunding in order to access funding, the investors choose or signal where to invest their valued money by selecting one or more projects themselves.
7Kleemann, F., Gunther Voß, & Kerstin Rieder (2008). “Un(der)paid innovators: The commercial utilization of
consumer work through crowdsourcing”, Science, Technology & Innovation Studies, 4(1),5–26.; also in “The Working Customer – an Emerging New Type of Consumer” 2-11
<http://www.allgemeine-psychologie.info/cms/images/stories/allgpsy_journal/Vol%203%20No%202/rieder_vo ss.pdf>
8Andrea Ordanini, Lucia Miceli, Marta Pizzett & A. Parasuraman, (2011). Crowd-funding: Transforming
customers into investors through innovative service platforms. Journal of Service Management, 22(4), 443–470. <https://www.emerald.com/insight/content/doi/10.1108/09564231111155079/full/html> accessed 5 May 2020.
9Belleflamme et al. (n 1).
10Diego Herrera, “Alternative Finance (Crowdfunding) Regulation in Latin America and the Caribbean - A
Balancing Act” Institutions for Development Sector Capital Markets and Financial Institutions Division, Inter-American Development Bank, DISCUSSION PAPER Nº IDB-DP-480, September 2016, 6.
In this process, crowdfunding platforms are mainly an electronic means to connect those investors with projects. This allows clients’ money to be frequently separated from the platform’s own balance sheet or is kept for a very short time while the money goes from investors to projects. Platforms offer these projects through their websites and social media, 11
providing investors with different “packages” to choose from.
A characteristic of the crowdfunding dynamics in that is executed without the physical presence of any of the three participants mentioned above: investors, platforms and promoters interact electronically. 12
The normal process for a crowdfunding transaction involves that after selecting a project to invest in, the individual investor would select and authorize a transfer through an electronic mechanism from its bank account, debit or credit card, or electronic money suppliers to the selected project. Thereafter, the proceeds are sent from the electronic accounts of platforms or investors to the selected projects. They may receive the total amount requested or a portion of it, depending on the rules of the platform.
Some platforms allocate a certain window of time for projects to receive the target amount of money, and if a project is only partially funded in such a window, resources are not transferred to the projects and are returned to investors. This is known as the “All or Nothing” model. In the case of equity, this characteristic is even more common, with platforms performing a stricter screening process on projects and sometimes even charging for the evaluation of the project in areas such as valuation, profile, and legal issues. Some platforms require developers to pre-fund projects to ensure that funding will be completed. An alternative to all-or-nothing funding is the “keep it all model”, where promoters can keep any amount raised for their projects, even if the total amount needed is not reached. 13
b. Crowdfunding Framework. Who is the investor? i. Backers
Backers are the individuals who provide the capital to fund the projects presented by the platforms and idealized by the developers. According to the so called 'all-or-nothing'
11Ibid. 12 Ibid. 13Ibid, 8.
principle that most platforms employ, the fundraisers only receive the money pledged if the funding goal is reached within the agreed deadline. In turn, backers are commonly offered some type of reward for their support. 14
For the present work, the focus is on backers who support equity crowdfunding. Through equity crowdfunding platforms, the backers obtain shares or valuable interests in the project that they are backing. This, of course, makes them direct investors in the project.
ii. Platform
An intermediary, here the crowdfunding platform, serves to connect entrepreneurs and funders. In contrast to traditional financial intermediaries, crowdfunding platforms do not borrow, pool, and lend money on their own account. They focus on the matching of project initiators and backers by providing information about the projects and functionalities, e.g. for reducing the risks of the investment. 15
The first investment identified regarding the platform, is the platform itself with the software that helps run it.
In addition, as further explained in the simple subscription method, crowdfunding platforms can also be investors in the projects that reach out for its services.
iii. Developers
The entrepreneurs publish their idea on a chosen Crowdfunding platform to the everyday internet user to gain direct market access and financial support from potential customers. Crowdfunding platforms grant entrepreneurs that would normally be excluded from reaching traditional funding (such as angel investors) the possibility to find funding in another pool. The present work does not consider developers investors in the crowdfunding dynamic, though a case could be made in favor of developers who propose civic crowdfunding initiatives which are later backed by a governmental entity.
14 Ibid n 3.
15 Michael M. Gierczak, Ulrich Bretschneider, Philipp Haas, Ivo Blohm & Jan Marco Leimeister
“Crowdfunding: Outlining the New Era of Fundraising” (2016) Crowdfunding in Europe: State of the Art Theory and Practice (Springer, 2016) 7.
Another aspect of the crowdfunding context must be analyzed: the contractual relationships. These include the agreements between investors and platforms, investors and promoters, and promoters and platforms. 16
Typically, such contracts are electronically signed within the platform.
First, in this basic model, it is frequent to find that originator’s contractual bilateral obligations with investors are limited to basically matching investors and projects, transferring their money to projects, and collecting or recovering the respective financial returns.17 These contracts may include a disclosure on the risk associated with these investments, including credit, exchange, operation, or even systemic risks. For example, it is frequent to find indemnity clauses for the platforms, and in some cases dispute resolution, arbitration, and waiver procedures, usually conducted electronically or in courts in the legal domicile of the platform.
Second, developers sign an electronic contract with the platform. Contractual obligations may include a commitment to repay the loans by the agreed date, payments for platform services, and information about the development of the project, among others. Moreover, in the case of default, promoters are subject to monetary penalties (such as interest on arrears), reporting of default to credit bureaus, the lowering of their credit rating,
An additional impact of default which comes with the modernity that characterizes crowdfunding is that it will come accompanied by negative reviews published on the internet, which may impact the project’s reputation and another layer to the experienced damage. Contracts might resemble those used in traditional banking, at least in their financial components. Additionally, contracts may include obligations for the platforms. For example, contracts may include clauses to obligate them to deliver money to projects, to display project status on their websites or apps, and to comply with data privacy regulations. Also, clauses may include disclosure of fees, interest, and other financial charges. Dispute resolution mechanisms and a physical jurisdiction for any legal causes in contracts are also frequent components in contracts. 18
16 Ibid, 9.
17See for reference: https://www.kiva.org/legal/terms#Section 18 Ibid, 10.
Finally, for the loans-based crowdfunding models, a direct contract between investors and promoters may be signed for each individual operation, establishing the obligation of repayment of interest and capital for the latter, among other details. 19
Investors receive capital and interest for the money they lent in the past until the conditions stipulated in the bilateral contract they electronically signed with promoters are met. 20
c. Classification
Though scholars differ slightly in the way they classify the methods of crowdfunding, they generally agree on four variations: equity, reward, charity and lending.
For the present work, the clearest classification is the one provided by Charbit and Desmoulins, who divides them firstly into the investment model and the donation model. 21
The investment model contemplates financial returns for funders. Crowdfunding is a significant support for entrepreneurs, start-ups and artists that cannot easily reach funding through traditional methods (i.e. banking and stock markets). It also offers new opportunities in the real estate market where small firms can crowdfund from local communities to support their projects. It is divided into three main categories: equity, lending and royalty-based crowdfunding
→ In equity crowdfunding, companies raise money through online investors who receive shares in the businesses in exchange.
→ Debt-based crowdfunding, also known as the “lending model”, allows individuals to lend money for a specific project, with interest.
→ Royalty based crowdfunding, offers funders a percentage of the revenue generated from the project (once it is generating capital).
The donation model allows individuals to financially support a project with no expectation of a return. This model is divided into two categories: reward based and donations without
19Ibid, 10. 20 Ibid, 11.
21 Claire Charbit & Guillaume Desmoulins, "Civic Crowdfunding: A collective option for local public goods?"
(2017), OECD Regional Development Working Papers, No. 2017/02, 9, OECD Publishing, Paris,
objective reward.
→ The reward-based model consists of contributing in exchange for any kind of reward, which can be gifts or visible written acknowledgment on the platform etc. → Donation without objective reward is driven by other incentives such as community benefits and/or moral issues. Civic crowdfunding relies mainly on the donation model.
2. Parallel between traditional investment and Crowdfunding a. Equity Crowdfunding
The main characteristics of equity crowdfunding is that it issues equity which is distributed to the public. Consequently, investors own a small share of the company and then receive a portion of the profit, which is proportional to their investment. 22
In Western countries, with the support of favourable legal and political frameworks, it is above all equity and lending platforms that have brought crowdfunding into the market economy. Moreover, they can prove useful in allowing businesses to bypass traditional23 sources of funding (business angels, banks, or venture capital funds). 24
The equity crowdfunding market is relatively new, with the first few platforms founded in 2009 in the UK (by Finnish entrepreneurs), and Canada. 25
Filling a financial gap through the democratization of capital. Sourcing equity from traditional sources, like venture capital or angel investor networks, relies on a small group of high net worth individuals that may not represent the entire market for securities. 26
22Arash Gholamzadeh Nasrabadi, “Equity Crowdfunding: Beyond Financial Innovation”, 2016, Crowdfunding
in Europe: State of the Art Theory and Practice (Springer, 2016) 201.
23Victor Rouze, Introduction in “Cultural Crowdfunding, Platform Capitalism, Labour and Globalization”
University of Westminster Press 2019.
24Ibid 7; Thomas Lambert & Armin Schwienbacher, “An Empirical Analysis of Crowdfunding, Social Science
Research Network” 2010, <http://ssrn.com/abstract=1578175> Accessed 09 June 2020
25Miikka Kukkosuo, “Venture Capital 2.0: Grow VC Launches Private Beta” (2009)
<http://arcticstartup.com/article/venture-capital-2-0-growvc-launches-private-beta-we-have-invites/> accessed 15 June 2020.
26Mckenzie Rainey, Sheen Sagalongos, James Tnasey, Varun Srivatsane, “Equity Crowdfunding: A New
Model for Financing StartUps and Small Businesses” (UBC Sauder Centre for Social Innovation & Impact Investing.. Vancouver, Canadian Electronic Library/desLibris, 2017) 15.
The similarities with traditional investment are quite transparent, since the investor of equity crowdfunding acquire shareholder status at the company where it bought the participation. However, depending on the method of the investment, this may not be such a direct outcome. This issue will be further discussed in the section for “investment methods" of the present sequence.
b. Civic Crowdfunding
Civic Crowdfunding seems to automatically evoke the notion of the donation models. Most authors agree that Civic Crowdfunding necessitates contributions from donors who do not expect any financial return.
However, UK-based Crowdfunding Platform “Spacehive” shared a guidebook which, among other points, explains the crowdfunding models which are appropriate for civic crowdfunding. In addition to naming the usual suspects of donation based crowdfunding, reward based crowdfunding, the guidebook includes community shares and municipal bonds as ideal crowdfunding models for civic crowdfunding. 27
Community shares are a form of withdrawable share capital unique to co-operative and community benefit legislation. This type of share capital can only be issued by co-operative societies, community benefit societies and charitable community benefit societies. 28
The inclusion of municipal bonds is notable since the issuance and trading of these instruments is already contained within domestic frameworks and executed through traditional mechanisms. How can municipal bonds (and community shares) be considered branches of crowdfunding when there is no crowdfunding platform involved?
Municipal bonds are bonds issued by a local government or one of its agencies. Just as with traditional sovereign bonds, the buyer of a municipal bond becomes a lender to the government. The investor is guaranteed a stream of future interest payments over the period of the bond, and the invested amount paid back in full when the bond reaches maturity. 29
27Hannah Griffiths, Civic Crowdfunding, a guidebook for local authorities, Future Cities Catapult
<https://about.spacehive.com/wp-content/uploads/2017/03/Civic-Crowdfunding_A-Guide-for-Local-Authorities .pdf> accesed 7 June 2020, 10.
28ibid 29 ibid.
The municipal-bond model is most commonly used in the United States. However, the experience of combining crowdfunding and the trading of municipal bonds in the United States was not successful. This is the case of Neighborly, a start up which intended to bring the crowdfunding approach popularized by Kickstarter to the $3.8 trillion municipal-securities market. Instead of selling bonds in minimum lots of $5,000, it would30 sell them in small amounts so local residents could buy them, expanding the market beyond the wealthy buyers and big investment firms who currently dominate it.
Neighborly went on to default in October 2019. However, its critics do not discard the possibility of other startups trying to break into municipal bonds, but are doubtful that they would be much more successful than Neighborly, especially if they tried the same approach. 31
Thus, a different approach would bring a new possibility to accessing municipal bonds through crowdfunding.
c. Investment Methods
There are two main, distinguishable investment methods: the simple subscription method and a pre-auction method. 32
i. Pre-auction Method
In the pre-auction method the value of the shares is determined by the demand of investors. The advantage is a realistic market estimation of the company value. On the contrary, irrational exuberance might be a result through rising share-prices. The investor contracts with the platform in the first step, which itself participated in the start-up and refinanced the participation through a following submission of shares in a second step. The advantage is a reduction of complexity for the start-up, which has only one investor and not many small ones . 33
30Matt Levine, “Money Stuff: Muni Bonds Remain Undisrupted”, (Bloomberg, 17 October 2019)
https://www.bloomberg.com/opinion/newsletters/2019-10-17/money-stuff-muni-bonds-remain-undisrupted
accessed 1st May 2020
31Brian Chappatta, “The Problem With Bringing Muni Bonds to the Masses, The failure of startup Neighborly
underscores the pitfalls of crowdsourcing state and city debt.” (Bloomberg, 21st October 2019)
https://www.bloomberg.com/opinion/articles/2019-10-21/problem-with-bringing-muni-bonds-to-the-masses
accessed 1st May 2020
32Anja Hagedorn & Andreas Pinkwart, “The Financing Process of Equity-Based Crowdfunding: An Empirical
Analysis” 2016, Crowdfunding in Europe: State of the Art Theory and Practice (Springer, 2016) 71-85
This method, also referred to as “transaction engineered model” usually offer their investors investment-type contracts, or securities in an intermediate vehicle. As Described by De Buysere et Al , intermediate holding vehicles may either be set up for each crowdfunding 34 campaign, business or project individually, or for all portfolio firms on a platform. After a crowdfunding campaign has been successfully conducted, the intermediary vehicle may either continue to act as the owner of the equity stakes in the crowdfunding campaigns or businesses, or they may distribute the stakes among the investors. The latter may take place in various ways. The platform may either directly transfer the shares from the intermediary vehicle to the investor, underwrite the equity raise on behalf of the investors on the basis of a power of attorney, or sell options from the intermediary entity to investors that investors may exercise if a crowdfunding campaign has been successfully conducted. Either way the platform is an intermediate vehicle that acts as counterparty to investors, putting them in a similar position to if the shares of the portfolio firm(s) had been underwritten in the traditional way.
ii. Simple Subscription
The simple subscription method works after the first come-first serve principle. In this case the investment contract is made directly between the company and the founder, while the platform provides the infrastructure and support . 35
This model, also known as the “eBay model”, only provides the technical medium through which potential investors and investees can get in contact with each other. Therefore, the platform operator itself does not constitute a party in the equity raise that may ultimately result, and is a mere connector of investors and projects or businesses. The eBay model is more suitable to some investor preferences that dislike the constructions under transaction-engineered crowdfunding platforms. 36
34Sebastiaan N. Hooghiemstra & Kristof de Buysere “The Perfect Regulation of Crowdfunding: What Should
the European Regulator Do?” “Crowdfunding: Outlining the New Era of Fundraising” (2016) Crowdfunding in Europe: State of the Art Theory and Practice (Springer, 2016), 141
35 ibid. 36Ibid n. 23.
Each model has its own limitations, uncertainties and advantages. However, as platforms want to overcome the problems related to crowdfunding offerings, the transaction-engineered model is prefered in use. 37
This results in arbitral tribunals having to analyze the method chosen for the equity crowdfunding investment in order to settle who is the investor. The simple subscription method assimilates to a regular share purchase, while the pre-auction method involves the crowdfunding platform.
The interaction of the participants of crowdfunding models and the way the models are set up open the door for a number of different outcomes in case of governmental interference. An incoming regulation can negatively impact and affect crowdfunding platforms. In situations were the platforms act as mere intermediaries between investors and developers, the effect may not be so negative. This hypothetical scenario assimilates to that of shareholders whose company shares become affected by an investment that failed due to unlawful governmental intervention.
However, in models in which the platforms effectively own parts of the offered projects, it may come to negatively impact both the platform and the project developers.
Another possible scenario to ponder is one in which a government regulation has a negative effect in an investment offered and developed through crowdfunding, resulting in its expropriation. Due to the nature of the crowdfunding business model, investors who cannot find judicial redress in the domestic system may have to recur to the international investment framework in order to have their claims heard.
3. Crowdfunding risks in international investment law.
As stated at the beginning of the present work, crowdfunding has elements of novelty. Mainly, the involvement of a third-party platform similar to a broker, where all the necessary operations are done through the internet. In addition, crowdfunded projects are characterized by having a vast number of investors who invested a very reduced amount.
One of the key particularities of crowdfunding is that the transactions between the developers, the platform and the backers are carried out entirely through the internet, thus permitting investments to be executed from anywhere in the world. Furthermore, crowdfunding investments often result in investors holding shares of the company that they invested in. Alternatively, they deal directly with the crowdfunding platform.
Investment treaty commitments are typically restricted to investments made within the territory of the respective contracting parties, since an investment is meant to benefit the economy of a host state in a manner that simply trading goods or services would not. 38
In this sense, crowdfunding investments may find a risk of falling under the scope of the investment treaty commitments based on the fact the share purchase may have been beneficial to a person that has never set foot in the host state.
In addition, the transaction is elaborated through the internet, using the crowdfunding platform as a tool, and neither of these elements can be easily regarded as withheld within a territory. Thus, in cases where the crowdfunding platform is the investment, it may also face problems regarding the territoriality requirement.
The present section will firstly develop on the risk of the crowdfunded shares not fulfilling the element of territoriality, and thus not qualifying as an investment under the relevant treaty. Secondly, the same issue will be addressed in terms of the crowdfunding platforms.
a. Can shares obtained through crowdfunding fulfill the territoriality requirement? The existence of a link with the territory of the host State is an element that contributes to identifying what investments are protected under the majority of investment treaties and, thus, to determining the scope of application ratione materiae of their provisions. 39
However, assuming that territoriality is explicitly or implicitly required by the relevant investment treaty, territoriality will not necessarily deprive a tribunal of jurisdiction. Rather,
38 David Collins, “Applying the Full Protection and Security Standard of International Investment Law to
Digital Assets”, Journal of World Investment and Trade, Vol. 12. No. 2, pp. 225-243, 2011, 226; See Art. 1 of the Agreement between The Swiss Confederation and The Arab Republic of Egypt on the Promotion and Reciprocal Protection of Investments.
39Caroline Kleiner; Francesco Costamagna “Territoriality in Investment Arbitration: The Case of Financial
recent finding is international investment arbitration does not focus on the physical location of the property making up the investment, but rather to where the benefits of the investment flow, particularly when dealing with non-tangible property. This reasoning derives that if40 the benefits of the investment concern the disputing State, jurisdiction will likely be upheld A leading case to have invoked this solution is Abaclat et al. v Argentina , which centered on 41 bonds issued by Argentina which were later bought by italian claimants in the italian secondary market. The arbitral tribunal focused on the nature of the instruments, depriving the territoriality requirement of any physical connotation, starting from the assumption that financial instruments such as bonds are not physical investments . Thus, the arbitral tribunal 42
highlighted the intangible nature of the instruments.
A similar solution was also found in Fedax v Venezuela, involving a promissory note, being held outside of Venezuela. Here, the arbitral tribunal remarked on the characteristic of the instrument, which is that it is not physically transferred to the territory of the beneficiary, but put at its disposal elsewhere. Additionally, the arbitral tribunal found that the instrument 43
formed a benefit to Venezuela in the shape of credit available to the State, which was in turn used by Venezuela, thus the interest in the promissory notes and other debt instruments were considered an investment in the territory of Venezuela. 44
Similarly, in SGS v. Pakistan The arbitral tribunals considered that the pre-shipment45
customs inspection service contracts which were predominantly executed outside of Pakistan, amounted to an investment in its territory because the benefits of those services occurred in the territory of the host government. 46
40Fedax N.V. v. Republic of Venezuela, ICSID Case No. ARB/96/3, Decision on Objections to
Jurisdiction, 11 July 1997, ¶ 41 (Fedax v Venezuela); [[KLEINER]] 318.
41Abaclat (formerly Beccara) v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and
Admissibility dated 4 August 2011,.available at http://italaw.com/documents/AbaclatDecisiononJurisdiction.pdf
(Abaclat Decision on Jurisdiction); Abaclat (formerly Beccara) v. Argentine Republic, ICSID Case No. ARB/07/5, Dissenting Opinion dated 28 October 2011.
<http://italaw.com/documents/Abaclat_Dissenting_Opinion.pdf (Abaclat Dissent)
42Abaclat Decision on Jurisdiction ¶ 374. 43 Fedax v Venezuela, ¶ 41.
44 ibid, ¶ 42.
45 SGS Society Generale de Surveillance SA v Islamic Republic of Pakistan, ICSID Case No ARB/01/13,
Decision of the Tribunal on Objections to Jurisdiction, 6 Aug 2003,(SGS v Pakistan)
The above findings are beneficial to the crowdfunding shares bearing in mind their nature as intangible property. However, the challenge lies in proving that the host state is obtaining some sort of benefit from a crowdfunding operation. This would of course be less of a challenge if the crowdfunded company does business with the State.
As a matter of fact, the dissenting arbitrator in Abaclat objected to the complete disconnection of the investment instrument to the territorial link. 47
Nevertheless, most modern investment treaties recognize that shareholders in a company have the right to bring claims on their own behalf, and investment treaty tribunals have adopted a broad concept of shareholders’ rights to bring claims, and have often attributed relevance to shareholders’ economic interests in the company injured by allegedly wrongful acts of the State. 48
In the present context, crowdfunded shares may struggle to meet the territoriality link under the direct benefit test. However, the benefit test has been criticized, and arbitral practice has been open to recognizing investors’ rights.
b. Can crowdfunding platforms fulfill the territoriality requirement?
Though shares are widely and traditionally recognized as investments, digital platforms are a phenomenon that postdate many investment treaties. As a result, crowdfunding platforms may face two challenges in the investment dispute field: do they fit the notion of investment? If so, is there a sufficient territorial link?
i. Crowdfunding platforms as investments.
The first requirement for digital assets such as websites, computer systems or a platform to be protected by the foreign investor’s home state's investment treaty commitments, it must first be determined that digital assets are under the scope of the concept of 'investments' as defined under the relevant treaty. 49
47 Abaclat Dissent ¶¶81-84.
48 Monique Sasson, Substantive Law in Investment Treaty Arbitration: The Unsettled Relationship between
International Law and Municipal Law (2nd Edition,; Jan 2017), 178-179; Borzu Sabahi, Noah Rubins & Don Wallace, Jr., “Investor-State Arbitration” (2nd. Edition, Oxford University Press) 2019, 393, see for reference fn. 154.
This will, of course, be subject to the specific wording of the invoked investment treaty. Notedly, investment treaties set forth a general phrase defining investments as constituting 'all assets' and enumerate several groups of illustrative categories. The inclusion of digital assets may be considered under a treaty references to intangible property as well as movable and intellectual property. However, even if a computer system or website is not considered50 to fit under the scope of any of the specific categories listed in the treaty, it may still qualify for investment treaty protection aided by the broad wording of “any type of asset” unless it falls into a category of things that are explicitly not investments. 51
Therefore, crowdfunding platforms can be considered investments under the description of “intangible assets”, “intellectual property” or covered by the “any type of asset” provision.
ii. Crowdfunding platforms and the meeting of territoriality.
Once the digital assets overcome the test to settle whether they are covered by the investment treaty, a second -and more trying- challenge comes across. A link to the host state’s territory is a more problematic attribute to assign to a website on the internet, though it may be sufficient to demonstrate that the company itself has a physical presence in the territory, such as an office or factory. However, for the purposes of international investment law and 52 investment treaty protection, the most potential claim that a website is within the territory of a state would be where the website is hosted by a server physically located within the host state, which would appear to follow the conventional understanding of internet jurisdiction. 53
Providing evidence of expenditures within the host state would assist the investor's claim of territoriality, as echoed by the reasoning of the arbitral tribunal in SGS V. Pakistan. For the 54
purpose of demonstrating the territoriality of a digital asset to the host state, an investor may provide proof of payment of a local web hosting company to host its website, or the purchase or leasing of local property to house the relevant server. In contrast, if the website was 55 50Rudolf Dolzer & Christoph Schreuer, Principles of International Investment Law (2nd Edition, Oxford
University Press) 2012, 63; Jeswald W. Salacuse, “The Law of Investment Treaties” (2nd Edition, Oxford University Press), 2015, 160. see article 1.a of the Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Republic of Chile, 30/11/1998.
51ibid. 52ibid
53 ibid, fn 11 & 12. 54 SGS v Pakistan ¶137. 55 Ibid n 38, 227.
simply reachable in the host state’s jurisdiction by way of the internet, the link to the jurisdiction would likely be too insubstantial, especially if the company had no physical presence within the territory. 56
Therefore, in order to demonstrate that a crowdfunding platform possesses a territorial link with the host state, the investors need to provide evidence of the physical presence of the company within the jurisdiction, that the website is hosted by a server physically located within the host state or evidence of expenditures for the purpose of the digital investment. Considering that crowdfunding platforms often require some sort of approval from the local financing authorities to operate in the domestic jurisdiction, the existence of a physical company and proof of expenditures will be easily met by crowdfunding platforms.
However, a challenge may arise if the crowdfunding company utilizes a server hosted in another jurisdiction to run its platform. In this case, it would be up to the tribunal to analyze if there is sufficient evidence to settle a territorial link.
c. Insufficient crowdfunding regulation as a breach of the full protection and security standard.
Though Crowdfunding is regulated in some jurisdictions , a lack of regulation or insufficient 57 regulation of this new financing tool might raise issues in the context of an international investment arbitration. Particularly, claimants may invoke a breach of the full protection and security standard.
The standards of treatment contained in investment treaties which are extendeded to investors may be found to consist of the following two main elements: the 'non-contingent standards' of fair and equitable treatment and full protection and security; and the 'contingent standards' of national treatment, MFN treatment, and non-discrimination. The distinction lays in the fact58 that the content of a contingent standard is determined, not by reference to the standard itself, but by reference to an exterior state of law or fact, namely the treatment accorded to other
56ibid.
57United States, Jumpstart Our Business Start-ups (JOBS) Act, April 5, 2012.; Italy, Legge di Stabilità 2017, 11
December 2016 n. 232.
58Campbell McLachlan, Laurence Shore & Matthew Weiniger, “International Investment Arbitration:
persons or entities, who stand in the requisite relationship to the protected investor . 59
Non-contingent standards, on the other hand, are absolute as they apply to protect a given entity irrespective of the treatment that may be accorded to others. It is for that reason that they present a potentially more valuable tool in investor protection. 60
In practice, since most investment treaties already accord fair and equitable treatment, whether protection and security obligations extend to legal security and the stability and predictability of the regulatory framework is unlikely to affect the outcome of a case. 61
Further, since fair and equitable treatment includes treatment in accordance with the minimum standard, it would appear that a general fair and equitable treatment clause includes the protection and security obligation. 62
While the fair and equitable treatment standard is concerned with the process of decision-making by the organs of the State, the full protection and security standard is concerned with failures by the State to protect the investor's property from actual damage caused by either State officials, or by the actions of others, where the State has failed to exercise due diligence . It is thus principally concerned with the exercise of police power . 63 64
The full protection and security standard has been considered in depth four leading cases: awards: AAPL v Sri Lanka , AMT v Zaire , Wena Hotels Ltd v Egypt , and Suez v 65 66 67 Argentina. The first three of these cases concerned destruction to property during internal68 armed conflict, riots and acts of violence. In Suez v Argentina, the Tribunal considered but
59 ibid. 60ibid.
61W. Michael Reisman, James Richard Crawford, Raymond Doak Bishop “Foreign Investment Disputes: Cases,
Materials and Commentary (Kluwer Law International, 2nd. Edition) 2014, 314.
62ibid.
63 58, 330, ¶7.242.
642012 US model BIT, art 5(2)(b).
65Asian Agricultural Products Ltd (AAPL) v Sri Lanka (Award) ICSID Case No ARB/87/3, 27 June 1990,
('AAPL v Sri Lanka'). <https://www.italaw.com/cases/96> accessed 28 July 2020.
66American Manufacturing and Trading Inc v Zaire (Award) ICSID Case No ARB/93/1, 5 ICSID Rep 11, IIC
14 (1997), Sucharitkul P, Golsong & Mbaye) ('AMT v Zaire'). <https://www.italaw.com/cases/76> accessed 26 July 2020.
67Wena Hotels Ltd v Egypt (Award) ICSID Case No ARB/98/4, 6 ICSID Rep 67, IIC 273 (2000, Leigh P,
Fadlallah & Wallace), upheld in (Decision on Annulment) 6 ICSID Rep 129, IIC 274 (2002, Kerameus P, Bucher & Orrego Vicuña).
68Suez Sociedad General de Aguas de Barcelona SA v Argentina (Decision on Liability) ICSID Case No
ultimately rejected an allegation that the host State could breach the standard by failing to provide a stable legal environment.
In this context, three main issues arise when discussing the full protection and safety standard: Is the State liable under the full protection and security standard? Does it include actions by non-state actors? and, Is the full protection and security standard limited to the protection of physical property or can it be extended to safeguard a secure legal environment? The present section will answer the three issues raised above in the context of crowdfunding investors.
i. State liability under the full protection and security standard.
The language of the general standard, referring to 'most constant' or 'full' protection and security suggests an exacting standard of care. However, In general, arbitral practice has 69 found that the standard of liability in case of violations of full protection and security merely requires due diligence and does not create absolute liability70 which must be assessed according to the particular circumstances in which the damages occurs. 71
In Pantechniki , the Sole Arbitrator further suggested that the adequacy of the State's72 response should be assessed in the light of the scale of the disorder and the extent of its resources, noting that a failure of protection and security likely to arise in an unpredictable instance of civil disorder which a powerful state could have easily controlled, but poor or fragile state may not have the capacities to do so. 73
Thus, a crowdfunding investor cannot claim absolute liability in case of a breach of the full protection and security standard, since States have a due diligence obligation to the standard.
69 ibid n. 58, 331, 7.246.
70Christoph Schreuer, “Full Protection and Security” Journal of International Dispute Settlement, Vol. 1, No. 2
(2010), 354; Tom Fecak, International Investment Agreements and EU Law, (Kluwer Law International, 2016) 38.
71 Elettronica Sicula SpA (ELSI) (United States of America v Italy) [1989] ICJ Rep 15, 76, para 128; AAPL v
Sri Lanka, ¶ 53; Tecnicas Medioambientales Tecmed SA v Mexico ICSID Case No ARB(AF)/00/2, Award 29 May 2003, ¶ 177, Noble Ventures Inc. v Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, ¶ 164; ibid, 355.
72Pantechniki SA Contractors and Engineers v Albania (Award) ICSID Case No ARB/07/21, Award 30 July
2009.
ii. Full protection and security from private parties.
The host State’s duty is not restricted to preventing damaging acts by private actors. The 74
State’s responsibility extends to actions perpetrated by its organs. 75
In AMT v Zaire, the investment had been the target of looting from Zaire’s officials. The Tribunal stated that Zaire had breached its obligation to provide full protection and security to the investment by taking no measure that would ensure the protection and security of the investment. 76
Furthermore, in Wena v Egypt, a British company, had entered into agreements with an Egyptian State owned company, to manage two hotels in Egypt. The hotels were looted, and staff from the State owned company participated in the attack. The tribunal found that Wena failed to demonstrate that Egypt had actually participated in the seizures, it determined that Egypt was aware of the seizures, but did nothing to prevent them and thus to award the investment with full protection and security. 77
The duty imposed by the full protection and security standard is one that rests upon the State. Nonetheless, due to its character of an obligation of diligence, the operation of the standard
78
does not rely on whether the acts that give rise to the damage to the claimant's investment are committed by agents of the State (which are thus directly attributable to the State) or by third parties. Rather the focus is on the acts or omissions of the State in addressing the unrest that gives rise to the damage. 79
Thus, The responsibility to ensure that foreign investors' property is not damaged exists irrespective of the lack of connection between the state and the party which caused the injury. As a result, crowdfunding investors also have the right to claim a breach of the standard if it has been damaged by the actions of third parties upon failure of the state to provide the due protection.
74 ibid n. 70, 357.
75International Law Commission's Draft Articles on State Responsibility, Art. 4. 76 AMT v Zaire ¶¶ 6.07 & 6.13.
77 Wena v Egypt ¶ 85 & 135. 78 ibid, 58, 333, ¶ 7.253.
79Genocide Convention (Bosnia and Herzegovina v Serbia and Montenegro) [2007] ICJ Rep 43, 182, ¶ 430;
Giuditta Cordero Moss, “Full Protection and Security” in Standards of Investment Protection, August Reinisch (Oxford University Press, 2008), 138.
iii. Legal security and protection.
This is the most important question regarding crowdfunding. Can the protection afforded by the full protection and security standard to physical property be extended to intangible property?
There is no disputing that the full protection and security standard encompasses the physical protection of the investor and its assets. However, regarding legal protection, investment 80
treaties do not explicitly address this issue. Only CETA clearly establishes that the standard 81
refers to the party's obligations relating to the physical security of investors and covered investments. Furthermore, the US 2012 revised model BIT, define protection and security in82 terms of 'police protection', a reference to a function of the State that is most naturally limited to protection of physical assets. 83
In addition, the Saluka v Czech Republic Tribunal concluded that the standard “ is not meant to cover just any kind of impairment of an investor's investment, but to protect more specifically the physical integrity of an investment against interference by use of force”. 84
However, other tribunals have interpreted that the full protection and security standard may be extended to confer the investment with legal protection. The Saluka v Czech Republic Tribunal after stating that the standard applies essentially to physical integrity, proceeds to apply it to the investment’s legal protection. 85
Other tribunals have relied on the extensive wording in the treaty , the frequent pairing of the full protection and security standard with that of fair and equitable treatment and/or protection against arbitrary or discriminatory conduct to extend the interpretation that full protection and security standard should reach any measure that deprives an investment of
80ibid, n. 70, 354; Borzu Sabahi, Noah Rubins & Don Wallace, Jr., “Investor-State Arbitration” (2nd. Edition,
Oxford University Press) 2019, 680, 19.103 & 681, 19.106.
81 [[refer mclachlan]] 7.257. 82 CETA, art X.9(5). 83 ibid n. 64
84 Saluka Investments BV v Czech Republic (Partial Award) PCA Case No 2001–04, 15 Partial Award, 17
March 2006, ¶ 291 ('Saluka v Czech Republic'), see also BG v Argentina, UNCITRAL, Final Award, 24 Dec. 2007, ¶ 326.
protection and security and is not limited to physical security. Other cases in which 86 tribunals have found that full protection and security has been breached because the investment was subject to unfair and inequitable treatment. As a result, if a State fails to 87 provide a secure investment environment may be treated as a failure to provide both fair and equitable treatment and full protection and security. This consideration is further reinforced88 where the investment treaty expressly refers to 'legal security' and where the protected investments include intangible as well as tangible property. 89
These authorities suggest that the standard of full protection and security invokes a clear duty towards tangible property, but also that the duty to provide a legal framework that offers legal protection to investors, including substantive provisions protecting investments as well as appropriate procedures that enable investors to vindicate their rights. 90
The duty that the full protection and security standard imposes involves the affirmative calls for States to bring its resources into effective action to protect and secure and may be contrasted with the consideration of the consequences of State legislative measures or judicial or administrative decisions that are the focus of fair and equitable treatment. The exercise of 91 the police power forms part of the State's use of the legal system in order to protect and secure investments. 92
The Suez v Argentina Tribunal considered that the stability of the legal environment is a 93 matter that must be analyzed in light of the fair and equitable treatment, contrasting it with the full protection and security standard which primarily aims to protect investment from physical harm, but this standard may also include an obligation to provide adequate
86CME Czech Republic B.V. v. The Czech Republic, UNCITRAL, Partial Award 13 September 2001. ¶ 613
(CME v Czech Republic); Azurix Corp v Argentina, ICSID Case No ARB/01/12, Award 14 July 2006, ¶ 406 (Azurix v Argentina); Compañia de Aguas del Aconquija SA and Vivendi Universal v Argentina, ICSID Case No ARB/97/3, Award 20 August 2007, ¶ 7.4.15 (Vivendi v Argentina).
87 Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of
Ecuador, ICSID Case No. ARB/06/11, 5 October 2012, ¶ 423 (Occidental v Ecuador).
88Biwater Gauff Ltd v Tanzania, ICISD Case No ARB/05/22, Award 24 July 2008, ¶ 729 (Biwauter v
Tanzania).
89 Siemens AG v Argentina, ICSID Case No ARB/02/8, Award 30 January 2007, ¶ 303. 90 ibid n. 70, 362.
91 ibid n. 58, 7.263. 92ibid.
mechanisms and legal remedies for prosecuting the State organs or private parties responsible for the injury caused to the investor. 94
According to McLachlan et al, “ The fair and equitable treatment standard is primarily concerned with the process of decision-making as it affects the rights of the investor, rather than with the protection of substantive rights (the latter being the function of the protection against expropriation and the guarantee of full protection and security). The concept of 'fair treatment' is concerned with the protection of fundamental rule of law values in decision-making by the organs of the State: predictability, accessibility, impartiality, and natural justice, as contrasted with arbitrary action”. 95
In Alasdair Ross et al. v. Costa Rica , Claimants alleged that Costa Rica, by failing to 96 provide proper vigilance and governmental regulatory supervision over the national financial system, had injured their investments in violation of the BIT provisions regarding full protection and security, fair and equitable treatment, due process of law, and protection against expropriation.
Unfortunately, the investments in the present case where in the form of deposits effected in a currency exchange company that was found to be ilegal, the tribunal found that it had no jurisdiction to understand the case, and did not further elaborate on the issue. However, the Tribunal did remark on the States role to provide safety from fraud and other harms that can do significant injury not only to individuals but to the economy as a whole. 97
Moreover, the arbitral tribunal in Siemens v. Argentina sustained that though the full protection and security standard could cover investments of an intangible nature, it is difficult to understand how the physical security of an intangible asset would be achieved. 98
It seems that shares must precisely fit into this notion, although they are not physical in the sense of solid and dimensional, they can be damaged in a measurable way. Therefore, though the physical security of an intangible asset may be a challenging concept, it must be duly considered.
94 ibid para 173.
95 ibid n. 58, 356, 7.355, fn. 568 & 569.
96Alasdair Ross Anderson et al v. Republic of Costa Rica, ICSID Case No. ARB(AF)/07/3, Award 19 May
2010, ¶ 16.
97 ibid, ¶ 54.
Since crowdfunding shares are intangible, the extensive interpretation that the full protection and security standard is meant to safeguard investments from legal threats can be in turn extended to the obligation of providing legal safety to non-material investments.
4. Regulatory Arbitration as a means to protect Crowdfunding related risk.
Regulatory arbitration, or litigation, is a tool through which using procedural mechanisms in conjunction with a pre existing substantive norm, an unanticipated risk of harm may be addressed. 99
In order to determine whether class arbitration can be considered regulatory, a three prong test has to be applied: intent, a pre existing substantive norm, and a rule or remedy that provides a forward-looking effect. Each of these elements must be met. 100
Some jurisdictions have adopted class action procedures in their national courts, either through legislation or court rules, and have been involved in mass arbitration cases. 101 This suggests these jurisdictions have demonstrated a legislative intent to allow large-scale dispute resolution mechanisms to operate in a regulatory manner. 102 A bigger issue comes up when the respondent State does not envision mass litigation rules in its domestic system.
This point requires a return to the leading case Abaclat, since Argentina did not envision mass procedures in its domestic system.
Though investment arbitrations are often already considered to be regulatory in nature, 103 it is still useful to embark on an analysis of Abaclat to determine whether the dispute constitutes a form of regulatory litigation as a result of the use of large-scale procedural mechanisms . 104
99Patrick Luff, “Risk Regulation and Regulatory Litigation”, Rutgers Law Review, Vol. 64, p. 73, (March
2011), Oxford Student Legal Studies Paper No. 10/2011, 213 available at <https://ssrn.com/abstract=1782852> accessed 06/07/20.
100Ibid.
101Stacie Strong, “Regulatory Elements of Class, Mass, and Collective Arbitration.” Class, Mass, and Collective
Arbitration in National and International Law (New York, 2013; pub online Apr. 2015). ¶¶1.12-1.28. available at <http://dx.doi.org/10.1093/acprof:osobl/9780199772520.003.0005>
102Gary Born “International Commercial Arbitration” 2nd ed. (Kluwer Law International 2014) 951.
103Gus Van Harten and Martin Loughlin “Investment Treaty Arbitration as a Species of Global Administrative
Law” The European Journal of International Law Vol. 17 no.1 (2006), 148 <http://ejil.org/pdfs/17/1/65.pdf>
and to make a parallel with crowdfunded investments. Each of the elements of the three prong test of regulatory arbitration will be addressed in turn.
i. Intent.
The first aspect of the test for regulatory litigation requires “not only the desire to influence behavior as the conscious object of the one who would regulate, but also the desire to prevent some future, risk-producing behavior.” 105
The majority award clarified that “collective proceedings are consistent with the purpose and object of the BIT.” , but this statement does not reflect an intent to regulate. On the 106 contrary, the Arbitral Tribunal expressed that its decision regarding the use of mass proceedings was not intended to act as a form of procedural precedent and denied that it had taken any policy considerations into account when determining the various issues, indicating instead that the outcome was based on a strict reading of the bilateral investment treaty itself.
107
However, regulatory intent is not solely dependant on the mentality of the court or tribunal and can be demonstrated by the disputing parties.108 All that is necessary is that the actor providing the requisite intent “intend[s] to produce some action on the part of the target of regulation because of the risk (and the litigant’s or judge’s apprehension of the risk) that the target actor’s future behavior will fall short of the relevant norm.” 109
Seemingly, the bondholders in the Abaclat case envisioned a type of regulatory intent at the moment of filing their arbitration, where they claimed that the major threat to the efficiency of foreign debt restructuring is rogue debtors, such as Argentina. Consequently, opening the door to ICSID arbitration would create a supplementary leverage against such rogue debtors and therefore be beneficial to the efficiency of foreign debt restructuring. 110
While the Dissenting Arbitrator questioned the propriety of the claimants’ application of investment arbitration as a means of creating “leverage over sovereign debtors,” the 105 Ibid n. 99.
106Abaclat Decision on Jurisdiction, ¶513. 107 Ibid, ¶¶227, 523–527.
108 Ibid n. 103. 109 ibid.
Dissenting Opinion did not dispute that that was claimants’ aim.111Therefore, it would likely appear that the necessary regulatory intent existed in Abaclat.
The intent requirement will necessarily have to be analyzed on a case by case basis, but will likely likely be met by claimants who have not only the desire to influence behavior as their conscious object, but also the desire to prevent some future, risk producing behavior. 112
Should crowdfunding centered international investment arbitrations arise, the intent element would need to be scrutinized under the merits of the particular case, but it will need to reflect the clear objective of influencing a concrete situation while simultaneously preventing a future potential risk.
ii. A pre-existing substantive norm.
The regulatory arbitration test requires the existence of a previously established substantive norm as a second step. 113
The existence of this second element is easily met in mass arbitration in the investment context, due to the substantive rules contained in investment treaties that are to be enforced through arbitral proceedings, even in cases that involve novel substantive claims. 114 Even though the parties in Abaclat disagreed about the precise nature of the relevant norms and the extent to which they apply to the dispute in question, it is clear that the requisite rules exist and can be enforced through the arbitral proceedings. 115 Therefore, the Abaclat case fulfilled the second element of the test for regulatory litigation, and it is generally met in investment arbitration.
In this context, it is conducive to presume that an international investment arbitration regarding crowdfunding will meet this element.
111Abaclat Dissent. ¶265 112 Ibid n. 99.
113 Ibid n. 99.
114Abaclat Decision on Jurisdiction .¶¶251-298. 115Ibid.
iii. A rule or remedy.
The last requirement of the regulatory litigation or arbitration test calls for the existence of a rule, typically in the form of a remedy, that expresses the substantive norm and attempts to limit the threats to that norm.” 116 This requirement may be the most difficult to meet, due to the novelty of mass procedures in investment arbitration and the relative silence of the relevant treaties and procedural rules.117 Each of these concerns is addressed separately below.
a. Issues relating to novelty i. Procedural Inquiries.
The procedural issues in regards to mass arbitration can be condensed into the following main points: the number and identity of the claimants, the types of claims and the appropriate procedural mechanism to address the claims. Each of these issues will be developed in turn.
● Number of Claimants
The question with the number of claimants to be admitted into a mass proceeding is whether these types of large-scale procedures are really all that different from what the respondent might have expected from a dispute with a single claimant. There seems to be very few differences between the workings of the class action or class arbitration system and that of investment arbitration since both are characterized by multiple claimants against one respondent. 118
The multiplicity of potential claimants in investment arbitration arises as a result of the ‘standing offer’ consent mechanism in BITs, which provides no indication of the number, scope and type of claims that the state is likely to face. 119 This allows multiple investors to bring their respective claims how and when they see fit so the respondent state remains open to different types of claims or multiple claims from an unknown number of parties. 120
116 Ibid n. 103
117Abaclat Dissent. ¶265
118 Mariel Dimsey, “The Resolution of International Investment Disputes: Challenges and Solutions” Eleven
International Publishing, (2008), 202
119Abaclat Decision on Jurisdiction, ¶513. 120Ibid n.118, 210.
Therefore, no problems can arise in regards to the identity of the various claimants, since each and all of these individuals could have brought their claims in bilateral proceedings. 121
Furthermore, as echoed by the Abaclat majority, “Assuming that the Tribunal has jurisdiction over the claims of several individual Claimants, it is difficult to conceive why and how the Tribunal could lose such jurisdiction where the number of Claimants outgrows a certain threshold.”
Thus, the fact that crowdfunding investments are characterized by the large number of investors behind them, and that this would entail a mass arbitration proceeding with a large number of claimants, should not be an issue to prevent such a claim from being presented.
● Types of Claims.
This point corresponds to “what” can be claimed in a mass procedure.
This question is less problematic in situations involving homogenous claims, since those cases present the respondent with what is effectively a single substantive claim. 122 While certain adjustments might need to be made in cases where some claims or defenses apply to one group of claimants but not another, that type of situation may be resolved through the use of subclasses, as suggested by the Abaclat majority.123 Furthermore, this is decided by reference to the substantive norms encompassed by the bilateral investment treaties and relevant agreements, all of which will be the same independently of whether the claims are brought individually or collectively. 124
According to the majority in Abaclat, the claims brought forward do not have to be completely identical, but rather reach a level of sufficient homogeneity. 125 The majority decision considered that since the claims were not of a contractual nature, but based on the substantive rights provided by the relevant treaty, the specific circumstances of the individual purchases by the claimants of security entitlements turned irrelevant. 126
121Abaclat Decision on Jurisdiction, ¶537. 122Abaclat Dissent, ¶¶134-135.
123Abaclat Decision on Jurisdiction, ¶¶666–69. 124Ibid n.118, 209-210.
125Abaclat Decision on Jurisdiction, ¶540. 126Abaclat Decision on Jurisdiction, ¶¶540-544.
