Crowdfunding is Mainstream? – Not for All.
Unless you’ve been living on another planet since the last decade, you’ll know that the advent of crowdfunding was a direct result of the financial crisis in the late noughties. Startups, small businesses, charities and the like had no access to the financial markets and could not fund their projects from traditional sources like banks or from equity sales through broker channels.
The sheer growth of crowdfunding, as well as other alternative funding methods such as crypto-funding through private investor platforms is staggering. In North America alone, there were 375 crowdfunding platforms by end 2014 and 1,250 worldwide. By 2015, the global volume of crowdfunding had grown to $16.2 billion and is expected to reach $49 billion by end 2018 rising to $110 billion by 2021.
Crowdfunding may seem to have reached the mainstream status, but only for a small segment of modern, tech-savvy investors who are street-wise enough to be able to handle the risks it entails.
From an investor standpoint, crowdfunding is still the Wild West. Regulations are minimal if at all and crowdfunding platforms lack the tools for due diligence on fund seekers. The vast majority of the world’s people who invest in the more traditional instruments such as listed shares or stock funds are not yet up to the challenge crowdfunding brings.
There have been too many scams. Take the famous BitConnect Bitcoin investment lending platform. It made inroads into the crypto-funding scene with an Initial Coin Offering (ICO) in December 2016. During 2017 BitConnect stabilized its position as one of the best performing cryptocurrencies on CoinMarketCap. But despite its rapid growth, BitConnect was frequently labeled a Ponzi scheme by a small, but loud crowd of skeptics. In January 2018, soon after its market cap had peaked at $2.6 billion BitConnect abruptly announced shut down of its lending and exchange services.
For the masses, the BitConnect shutdown came as a surprise, but the writing was on the wall from the day one. Namely, BitConnect had registered false facts about its business, including its location and the identities of the founding members, i.e. information that a due diligence check carried out by a professional would have exposed.
Another famous crowdfunding scam was Imperia Invest IBC (Imperia) for defrauding more than 14,000 investors worldwide. Imperia raised in excess of $7 million, $4 million of which was collected primarily from deaf investors in the United States. According to the Securities and Exchange Commission’s complaint filed in the U.S. District Court for Utah, Imperia defrauded investors by soliciting funds via the internet to purchase Traded Endowment Policies (TEP), the British term for viatical settlements. Its unrealistic business proposal promised to pay investors a guaranteed return of 1.2% per day. Additionally, the company wasn’t even lawfully registered anywhere in the world, although it claimed to be licensed and located in both the Bahamas and Vanuatu when, in fact, it was not licensed to do business or located in either of those countries.
So, as the two scams described above reveal, the fundamental challenge with alternative funding mechanisms such as equity crowdfunding, crowdsourcing and crypto-funding today is the remarkable lack of cost-effective due diligence services available to crowdfunding and crypto-funding platforms to become self-regulating and ensure the legitimacy of their assets to protect the interests of small investors.
Can crowdfunding become truly mainstream? It seems obvious, but not before the alternative investment methods and platforms provide a safer and more credible, self-regulated marketplace. Otherwise, it will remain a niche investment playground.