InternationalConsider crowdfunding from an economic analysis of law perspective and discuss crowdfunding within Cyprus.

October 20, 2020

Consider crowdfunding from an economic analysis of law perspective and discuss crowdfunding within Cyprus.

Author: Mr. Charalambos Papasavvas
Co – founder of Flywit Corporation Ltd
Founder of Neocourses Innovation Center



Macroeconomic turmoil as a result of the recent international financial crises has led many enterprises to seek funding from alternative sources in order to pursue their business objectives. In circumstances of reduced lending from traditional financial institutions, many have considered that crowdfunding may be able to play an important and supportive role in the market by ensuring valuable innovations continue to receive the capital they need to provide their useful services to society. Crowdfunding is a financing process whereby a project owner presents a business plan to the public, using a dedicated crowdfunding platform. Investors who are impressed by the project’s credentials are then able to contribute funds to the project and in this way, they jointly ‘crowdfund’ the project or enterprise.

The present essay will consider the field of crowdfunding from the economic analysis of law perspective. The economic analysis of law perspective applies the tools of macroeconomics to legal problems and these views have been advanced by authors such as Posner. The present essay will begin by elucidating the basic principles underlying the economic analysis of law perspective and go on to present a critique of the perspective. It will then go on to discuss crowdfunding in the context of an economic analysis of law perspective. Although this essay will focus on the jurisdiction of Cyprus, that country does not yet have a significant crowdfunding market in operation. For these reasons, the present essay will go on to discuss how the economic analysis of law can be applied to the practice of crowdfunding in general and this discussion will help to provide an insight into the way in which crowdfunding can be of most benefit to Cypriot society.

The essay will then provide a brief background on the country of Cyprus and discuss the Cypriot economy, both regarding its historical tradition of cooperative societies as well as its social economy (including social enterprise). The essay will then discuss the financial crisis that occurred in 2008 and the way in which that affected the Cypriot social economy. The paper will then discuss crowdfunding as a potential way to boost the Cypriot economy in these circumstances. The essay will consider the existence and regulation of crowdfunding in the jurisdiction of Cyprus and potential for and development of crowdfunding in the country from an economic analysis of law perspective. As will be discussed, the crowdfunding market in Cyprus is currently in its early stages only although there is significant scope for crowdfunding to play a role in helping to fund commercial and social enterprise. It is hoped this analysis will help the author identify ways in which crowdfunding will be of benefit to Cyprus in the future.


The Economic Analysis of Law Perspective 

The economic analysis of law perspective questions the impact that legal rules have upon the behaviour of human beings. Parties affected by laws promulgated by state authorities are described as ‘relevant actors’ by Kaplow and Shavell. In this respect, the economic analysis of law perspective assumes the relevant actor is also a ‘rational actor’, who will behave in their own best interests. As will be discussed, criticisms have been raised regarding this assumption.

Additionally, the economic analysis of law perspective draws conclusions about the desirability of legal rules and conclusions and as to whether or not the effects of legal rules are socially desirable. In this respect, Kaplow and Shavell suggest the economic analysis perspective takes into account the framework of welfare economics and asks both positive and normative questions about law and legal rules.

The economic analysis of law perspective may be traced to Bentham, whose early work in the 18th century investigated the way in which individuals respond to legal incentives. His analysis considered responses to rules within the context of social welfare and utilitarianism. More recently, the economic analysis debate has been developed by writers including Coase, Becker, Calabresi and Posner. These and other authors have generally discussed a particular branch of the law (such as torts and compensation, property rights or criminal justice).


Critique of the Economic Analysis of Law Perspective

As discussed by Kaplow and Shavell, there have been a number of criticisms of the economic analysis of law perspective. For example, positive critique has argued that individuals and enterprises do not necessarily respond to legal rules in a compliant way. For example, those who commit crimes often do so to maximise their well-being but do so in a way that is in contravention of the law. This argument therefore identifies that the individual’s well-being is theoretically distinct from the concept of rule efficiency and also that the well-being of the individual may sometimes be in contrast to the well-being of the group; while the criminal may seek to benefit from the crime, most people do not want crimes to be committed and do not want their property or interests damaged by criminal criminal acts.

Underlying this analysis then, is the assumption that an effective rule follows a particular code of principle (for example, that it is better not to commit a crime than to commit it). This response identifies that society benefits in a wider and more general way from the rule of law and that while laws may prevent an individual doing what they want in a particular circumstance, laws are in place to benefit society as a whole.

Another criticism of the economic analysis of law approach has been that efficiency does not necessarily take into account wealth redistribution. Kaplow and Shavell give the example of the choice between strict liability and negligence when disposing of motor vehicle accidents and suggest that even efficient rules can lead to unfairness in practice when outcomes are disproportionately affected by the litigant’s socioeconomic status. Critics of the economic analysis perspective therefore suggest that it is not always appropriate to simply consider the efficiency of a legal rule, without considering the way in which the rule furthers the distribution of income as well.

In response to this argument, Kaplow and Shavell point out that questions of redistribution are ordinarily dealt with by a country’s national tax system and it is considered by the present author that such an argument is persuasive. Wealth redistribution will not be appropriate in every circumstance and it may not be easily achieved either. For example, it could be that a legal rule intended to achieve wealth redistribution accidentally served to widen the gap between the rich and poor in practice. This argument shows that some laws may affect society in an efficient way while others may go to serve wealth redistribution. These conclusions also have implications for the economic analysis of law perspective in terms of the welfare framework it adopts; again, the present author considers that questions of wealth distribution are a consequence of the underlying assumption that efficiency follows a particular moral code.

Further criticisms of the economic analysis of law perspective include the argument that some aspects of the legal system do not take efficiency into account whatsoever. For example, law made by judges is based on considerations of fairness, justice and human rights and this does not necessarily involve efficiency. In these circumstances, the present author considers an economic analysis may be appropriate to discrete legal circumstances although may not be applicable to the wider legal framework as a whole.


Applying an Economic Analysis of Law Perspective to Crowdfunding

The present essay seeks to consider crowdfunding in light of the economic analysis of law perspective. As such, this part of the discussion will consider some of the questions and issues that arise when applying an economic analysis to crowdfunding legislation. Despite conducting a search for materials, there is currently scant literature dealing specifically with the topic of crowdfunding from an economic analysis of law perspective. In this way, the author considers the present discussion goes some way to developing academic debate in this field.

One question that may be asked in regard to this field is the way in which a law regulating crowdfunding will affect the behaviour of parties to a crowdfunded enterprise. As mentioned, there are three main parties to any crowdfunded venture (including the project entrepreneur, online crowdfunding platform as well as the investor who provides the funds). Although it may be assumed that all three parties will be in agreement about an enterprise, it may sometimes be the case that a crowdfunding rule will have to prioritise competing interests where, for example, investor protection is concerned. This further suggests that the economic analysis of law is more relevant to the micro rather than macro legal perspective. From this perspective, it may be said that crowdfunding rules that ensure investor protection also serve to encourage crowdfunding activity, which may be considered beneficial for society.

Applying an economic analysis of law perspective to crowdfunding, the degree to which a legal rule encourages or restricts crowdfunding behaviour may be questioned. For example, a rule may encourage greater crowdfunding activity and this may be to the benefit of the project owner and investor. However, the crowdfunding venture may not necessarily be in the best interests of society as a whole as well, for example, a project could create technology that relies on minerals from the third world or a product that is energy-intensive and has harmful effects on the environment.

Again, this question forces some kind of weighing between priorities and decisions about what can or should be considered to be in the best interests of which party. It is arguable then that the economic analysis of law approach must involve some kind of decision about what is more (or less) beneficial to society and it is likely that there will be significant disagreement in this respect; for example, as to whether preserving the environment or providing humanity with a new product is more important. Arguably, the economic analysis of law perspective does not provide an answer in such circumstances.

It could be argued that projects with some kind of charitable purpose are the most desirable and this would suggest crowdfunding law should seek to encourage social enterprises, rather than merely private companies. However, it is also possible that a product developed for private and commercial purposes can end up having wider benefits for society as a result (for example, a social media platform that provides a useful social service). This example shows that social benefits can also accrue as a result of private enterprise and further suggests that the wealth redistribution critique of is misconceived.

 Questions are also raised as to the social desirability of crowdfunding in general and whether or not crowdfunding is socially beneficial or disadvantageous. For example, while it is arguable that funding socially advantageous projects is in the best interests of society, it may not be if crowdfunding law has negative impacts on investment behaviour and ends up causing instability within the wider economy. Clearly, questions about the efficiency of crowdfunding rules are subjective to the party in question and again, questions from an economic analysis perspective may remain most relevant to the microeconomic perspective.


Background: Cyprus

Cyprus is one of the smallest countries in the European Union (EU) and currently has a population of under 1 million people. This is considered proportionate to its small geographical size. Its GDP per capita it is relatively average when compared with other European countries. It is mentioned that while Cyprus is considered a complete island in legal terms, 36% of the territory is under the occupation of the Turkish Armed Forces and that region has been self-declared as the Turkish Republic of Northern Cyprus (TRNC). Turkey is the only country in the international community that is recognising the TRNC. As Apostolides notes, this can make it difficult for research into Cyprus and take account of the full extent of its economic circumstances.


The Cypriot Economy: Cooperatives

The Cypriot economy has periods of rapid growth but also steep recessions and problems of competitiveness are more severe in the northern region of the island. The island has a particularly long history of cooperative societies and these can be dated as far back as 1904 to the British colonial government. The model was however followed by the Republic of Cyprus ever since its independence in 1960. There were over 100 cooperative societies in Cyprus in 2012. As a result of the strong tradition of the cooperative, many social and solidarity enterprises were established as cooperatives and in this respect, the legal and regulatory environment is well-established.

Cyprus has generally used two main types of cooperative, including the credit cooperative (c-coop) based on the Raiffeisen principle and production cooperatives. For example, the credit cooperative had been operating on the basis of providing credit and unlimited liability to its members. Production cooperatives were limited liability companies but often had ties to local cooperative parties. Credit cooperatives essentially played the role of building societies and this meant they would often take part in local activities, for example, in building and construction for the local environment. Lending was also provided to small and medium business enterprises (SMEs) that were seeking financing in cities. The credit cooperatives are the second biggest credit institution in Cyprus and account for a third of all loans and deposits.

The study Wardrop et al. found that most enterprises in Europe rely on banks as their main source of funding and over half of the businesses use equity instruments. This is considered as being partly due to the fact that SMEs have few debt-based alternatives available and they are not able to access capital markets easily. Across Europe therefore, equity-based crowdfunding remains only 4% of traditional equity investments and is therefore relatively small in comparison to traditional venture capital. Lending has been improving since 2015 when credit standards were eased by the European Central Bank.


The Cypriot Economy:The Cypriot Social Economy and Social Enterprise

In addition to the cooperative system, Cyprus also has a number of economic structures dedicated to the social good, which include, “advocacy, welfare support of vulnerable groups, environment and other community initiatives”. The paper by Apostolides for example discusses several initiatives within Cyprus that seek to stimulate the social economy and social enterprise.

The social economy in Cyprus includes cooperatives, businesses and unions and they are generally active in areas such as social services, health, education, arts and crafts as well as  social protection. ‘Synthesis’ for example is as organisation that aims to encourage social entrepreneurship in areas that cater to Cypriot social needs. Apostolides also mentions social entrepreneur, George Isaias, who has been able to provide a lot of support and training to social enterprises. In terms of social enterprise, Anakyklos Perivalontiki is an organisation in Cyprus that has sought to generate private income from recycling activities. It was founded in 2010 and, according to this Charalambous, Isaias and BWB, “can be considered the first true social enterprise – its aim is to reduce landfill waste and to provide affordable textiles/clothes to the market”.

An enterprise in Cyprus may take form of a private enterprise, not-for-profit enterprise, social club or a charity and these are the only legal forms than an enterprise may take in Cyprus. As such, there has been less development of the social enterprise in Cyprus. Even though the concept of the cooperative has a long and successful history, the idea of the social enterprise is relatively new and underdeveloped in Cyprus and it is considered that the Government does not have enough sufficient policy in place for social enterprises to flourish to their full potential. In this respect, the Government of Cyprus has indicated it is interested in developing social enterprise in the country.

There is currently no specific legal format for the social enterprise in Cyprus and a social enterprise has to adopt one of the currently existing legal forms. In practice, social enterprises end up operating as limited liability companies. Social enterprises do not receive any particular benefits, subsidies or exemptions as a result of their charitable purposes.

As suggested by  Charalambous, Isaias and BWB, there is currently at debate taking place within Cyprus as to the role of the social enterprise in the development of the Cypriot social economy. The great potential of social enterprise has been recognised by the Government in its policy agenda of 2013 although it is recognised that much of the effort to raise awareness about social enterprise and social entrepreneurship has largely been a consequence of European Union or private sector initiatives.  In contrast, the concept of social enterprise has not yet been defined by policy or in the academic literature in Cyprus and as such, a number of social enterprises did not realise they would be seen as social enterprises by European member states.

It has been recognised that a number of factors can prevent a social enterprise startup from being successful in Cyprus and this is an important reflection of the ability of Cypriot law to stimulate useful economic activity. These barriers can include a lack of awareness of social enterprise within Cypriot society in general, as well as a lack of a suitable framework of law and policy. Lack of access to finance can also make it even more difficult for the social enterprise in Cyprus to be successful. In this way, the present paper argues there is great scope for further and sustainable economic activity in Cyprus and this is considered a relevant consideration from an economic analysis of law perspective. Before discussing crowdfunding in Cyprus, the following section will go on to discuss the domestic financial crisis in Cyprus and its effect on social enterprises.


The Cypriot Economy in Crisis

Between the late 1970s and 2009, Cyprus enjoyed strong economic growth as well as rising employment. As late as 2008, the Cypriot authorities were still stating that the country was financially stable and was managing its employment levels. However, the country experienced negative growth rate in 2009 and this was linked to the broader global financial crisis around the world. From then on, Cyprus experienced a debilitating financial crisis. By 2011, the country’s GDP fell by over 10%. Taxes began to rise and levels of disposable income also fell.

The Government of the Republic of Cyprus requested a financial bailout from the European Stability Mechanism (ESM) on the 25th of June 2012. Two of the largest banks however failed and the ESM refused to use the bailout money to support those banks. As a result, those banks closed down and were ultimately recapitalised through the bailing-in of bondholder and depositor investments. Levels of unemployment increased from 11.9% to 15.9% between 2012 and 2013 and levels have remained high for some years. Cyprus also received 10 billion euros from the International Monetary Fund (IMF) but the Cyprus economy is still in crisis and the number of people at risk of poverty is increasing.


The Cypriot Economic Crisis and the Social Economy

Some have considered these developments will have a negative impact on the social economy in Cyprus. For example, according to Apostolides, “credit cooperatives were faced with the choice of government support or extinction in March 2013” as agglomeration became a precondition of financial bailout support. As a result of the policies introduced, only 18 c-coops are now left. The Government of Cyprus currently has 99% of the ownership of the nation’s c-coops. As stated by Apostolides, “[r]estrictions on the ability of C-Coops members to buyback part of the shareholding have been placed at the request of the EU commission. As a result many worry that the credit cooperatives have lost their Social economy character”. Apostolides also mentions that the holdings of both the credit and production operatives are being reduced and that this may serve increase private market ownership and further reduce the social nature of the economy, which had been a hallmark of the Cypriot cooperative.

The economic crisis in Cyprus led to a significant reduction in the cooperative movement in Cyprus and Apostolides mentions that the raiding of deposits led to significantly reduced opportunities for finance and this further turned attention to alternative and local community financing options. Some social enterprises have not received the funding from traditional institutions they were expecting and in this context, crowdfunding can be an important alternative option for these enterprises.

Under the auspices of the new development strategy for Cyprus, the Directorate General for European Programmes, Coordination and Development is working with the Deputy-Minister for Development on a strategy to develop the social economy. In December 2013, a number of measures were announced by the Government to reduce unemployment and social exclusion and these included measures to boost the social economy. This has included promises to allocate funding to help social enterprises become established. However, despite these statements, further projects by social enterprises have yet to materialise.

The crowdfunding model has a lot of potential in Cyprus because the government does not currently provide matching funds, state aid or even tax benefits for alternative finance. According to research, lack of finance has been recognised as a significant barrier by Cypriot social enterprises when seeking to establish or grow their business. Apostolides recognises that in comparison to social enterprises that are well-established, many new and inexperienced enterprises are suffering from a lack of funding. Given these barriers to finance, there is arguably great scope for crowdfunding to develop in Cyprus.


Crowdfunding in Cyprus

The United States of America currently has the most substantial crowdfunding market, followed by the UK and China. The total online alternative finance market volume in Europe was €5,431m in 2015, which was an increase from the 2014 figure of €2,833m. This suggests and annual growth rate of 92%. The UK accounted for €4,412m of the EU figure for 2015. The crowdfunding market in the rest of Europe is significantly less active and there is currently only one functioning crowdfunding platform in Cyprus at the moment. ‘WeHugACause’ raises funds for charitable purposes and initiatives that have some kind of charitable outcome for society. The ‘WeHugACause’ platform also states that it provides a crowdfunding forum for innovative ideas as well.

The WeHugACause platform is designed to serve anyone in the world who has a particular cause they would like to pursue. This can potentially include innovations, artists or other kinds of startups. Often, this can include communal projects that seek to help other people within the community or pursue otherwise charitable purposes. Non-governmental organisations (NGOs) often look for ways of alternative ways for financing their charitable projects.

 The crowdfunding platform in Cyprus is based on the rewards or donations model and is not actively regulated. ‘WeHugACause’ has only listed four different projects to date and, as is evident from the website, the two projects currently listed on the site have been unsuccessful. This may be due to the small scale of the projects that are listed on the platform.  The first campaign on the WeHugACause platform was for a cancer society. This project sought to receive €2,500 euros but only received €1,107 euros. The second campaign was for a food product. Similarly, this project sought €5,000 euros but only received €800 euros as a result of the campaign.


Crowdfunding Regulation in Cyprus

Although it does not have a significant crowdfunding market and no equity market whatsoever, Cyprus still has legislation in place that could regulate a crowdfunding market if it ever began. Equity-based crowdfunding would be regulated by the Investment Services and Activities and Regulated Markets Law, Law 144(I)/2007, which implements the Markets in Financial Instruments Directive 2004/39/EC (MiFID Directive). According to Cypriot law, parties are only required to issue a prospectus if securities are offered to the public. In this respect, Cypriot law follows the scope, format and exemptions contained in the EU Prospectus Directive.

A project in the field of environmental sustainability called CrowdFundRES considers the low level of crowdfunding is a result of the strict regulation currently in place in Cyprus. For example, under the Business of Credit Institutions Law 66/1997, it is illegal for any body other than a licensed credit institution to engage in the taking of deposits or repayable funds unless they have been authorised by the Central Bank of Cyprus. For these reasons the authors conclude, “the development of lending platforms [in Cyprus] seems unlikely”.


Development of Crowdfunding in Cyprus

 Despite this, Wardrop suggests there is considerable room for development of crowdfunding in Cyprus. An organisation called ‘Crowdfunding4innovation’ considers there is currently a growing market in Cyprus for crowdfunding and that the market is beginning to establish itself. For example, ‘Crowdfunding Cyprus’ was a conference held in Cyprus in 2016 and run by KPMG and the Anirot Development Organisation. There were a number of speakers from the banking sector, as well as the Cypriot Government.

The crowdfunding conference promoted alternative methods of finance as a way in which enterprises are able to obtain for their projects and it also looked at the crowdfunding measures in operation in Cyprus today. The conference discussed the way in which crowdfunding could provide an alternative to traditional banking finance in Cyprus and discussed the ways in which the legal framework in Cyprus may be reformed, with regard to for example controls and risks.

It is the case however that there is considerable work to be done within Cypriot society to bring the process of crowdfunding to public attention and encourage suitable parties to get involved. Indeed, business enterprise provides multiple benefits for a national economy and considering the case of Cyprus from an economic analysis of law perspective, it is arguable that laws should be enacted to ensure that socially advantageous economic activity is encouraged in Cyprus. There is currently however little data available on the case of Cyprus. For this reason, the present essay will consider the report by Wardrop et al. in 2016 presented the research findings from the second Annual European Alternative Finance Industry Survey, which aimed to report on the development of the pan European crowdfunding and peer-to-peer lending markets in 2015.

In the terms of the European context, a number of crowdfunding platforms consider that national crowdfunding regulations were adequate and appropriate, however 28% thought national regulations were excessive and strict. 10% of the platforms interviewed felt that their national regulations were too relaxed. This suggests the Cypriot Government should pay close attention to the experiences of more experienced markets in order to ensure it benefits from best standards in legislation and policy.

The study by Wardrop et al. also looked at perceptions of risks in relation to the alternative finance industry. According to the report, these included, “increasing loan defaults or business failure rates, fraudulent activities or the collapse of platforms due to malpractice”.Wardrop et al.’s study also questioned crowdfunding platforms about the risks to further growth of the alternative finance industry  in the future. 42% of the platforms interviewed pointed to a, “notable increase in default rates (for loans) or business failure (for equity deals)”. Nearly half of the platforms interviewed perceived, “‘platform collapse due to malpractice’ as being ‘very high risk’ or ‘high risk’”, while 40% of the study participants considered, “fraud involving one or more high-profile campaigns, deals or loans as being highly risky.  Although this study was not directly relevant to Cyprus, it is arguable that many of these concerns would also need to be addressed by the Cypriot Government.

Indeed, as identified by Wardrop et al., there are difficult challenging macroeconomic conditions facing the alternative finance market and these challenges will need to be addressed by the Government of Cyprus to ensure that it achieves optimal economic activity in its economy. There is also likely to be continuing uncertainty about the challenges that the economy will face in the future, competition is likely to increase as the system matures and and it may be increasingly difficult to find high quality borrowers. This may mean that, “[a]lternative finance platforms’ credit scoring capabilities, robustness of underwriting and due diligence processes are likely to come under increased scrutiny from investors and regulators alike”.

In order to achieve optimal crowdfunding conditions, Wardrop et al. consider it will be important to continue promoting financial inclusion and transparency, in addition to emphasising creative innovation. It will also be important to improve credit risk scoring and increase control. When such changes are implemented, Wardrop et al. consider Cyprus will benefit through the provision of more services for the end user and through the adoption of best practice by its social enterprise community.



The present essay has sought to consider the practice of crowdfunding from an economic analysis of law perspective and has sought to consider these questions within the context of cyprus. As discussed Cyprus does not currently have a very active crowdfunding market and only has one crowdfunding platform. This platform is based on the donations model and is not regulated. As such, it has not been possible to put fully apply the economic analysis of law perspective to the process of crowdfunding in Cyprus because none of the laws have ever been implemented.

Further research could however examine how the laws that are applicable in Cyprus (European laws) are affecting the behaviour of parties to a crowdfunded enterprise. This could include a comparative analysis of the experience of different European countries in relation to for example, equity crowdfunding under the MiFID Directive. In this respect, the present study considers the Wardrop et al. study to be the most relevant to this discussion.

The present essay has also sought to identify the areas in which the national legislation of Cyprus is lacking and also hindering economic activity and social enterprise. In terms of the present essay’s objectives, it may be considered that this suggests Cypriot legislation should seek to encourage sustainable and secure economic activity within its domestic economy. However, to ensure that legislation has these efficient results, it is important for Cyprus to be clear about the outcomes it wants to achieve and in this respect, it may be beneficial to pay attention to the experience of other countries who have more advanced crowdfunding markets.




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