Crowdfunding poses benefits, risks: IOSCO

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Investment Executive | James Langton | Feb 6, 2014

Risks of crowdfunding

Crowdfunding has the potential to develop into a credible investment option says a new report from the International Organization of Securities Commissions (IOSCO) research department.

The report, which focuses on peer-to-peer lending and equity crowdfunding, provides a global overview of the phenomenon, and the various regulatory approaches to it. It says that the crowdfunding market has doubled each year for the last five years to an estimated US$6.4 billion in 2013, driven by annual growth in peer-to-peer lending. Equity crowdfunding is smaller and has grown at a slower pace, it says.

The report says that while the crowdfunding market is small, it is growing fast, and, given "the focus of policymakers and regulators on growth and funding of the real economy means that this segment of the financial industry has the potential to develop into a credible investment option for sophisticated and retail investors alike."

Indeed, it notes that there are a number of benefits associated with these funding models, including "the ability to raise capital without giving up large parcels of equity interest, the spreading of risk, higher returns for low cost capital and the boost to the economy through encouraging the growth of [small businesses]."

Get Full IOSCO Crowdfunding Report:  Download 62 page PDF

However, it notes that these benefits need to be balanced with the risks to retail investors, which include the risk of default or business failure, the risk of platform closure, the risk of fraud and the risk of concentration, the risk of illiquidity and cybercrime

The research concludes that the crowdfunding market does not present a systemic risk to the global financial sector at this point, however it suggests that this could change in time, given the industry's growth rate. It says the challenge facing regulators and governments around the globe is to strike a balance between encouraging crowd-funding and mitigating the risks associated with its growth, while protecting investor interests.

"With the next evolution of this industry being in the global nature of funding sources, the challenges ahead will include cross-jurisdictional contractual and legal harmonization, dispute settlement and resolution issues," it says.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Join our growing network of industry stakeholders, fundraisers and investors. Increase your organization’s profile and gain access to a dynamic group of industry front runners. Learn more About Us | Prezi or contact us at casano@ncfacanada.org.

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One Response to Crowdfunding poses benefits, risks: IOSCO

  1. Mathew Cagney says:

    Excellent report, thank you!

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