4 Risks Users must be aware of when using any Crowdfunding Website

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Crowdfunding is slowing catching on in this part of the world with places like Hong Kong and Malaysia have already issued circulars and consultation papers.

As South East Asia\u2019s first real estate crowdfunding site and the organiser of the region\u2019s first Expo for Property Investing and Crowdfunding (EPIC), we see many stakeholders eagerly jumping onto the crowdfunding bandwagon. The regular users may not be aware of the potential downside of crowdfunding. Hence, as a responsible stakeholder, we thought that it is timely for us to highlight what some of the risks users should be aware of when they use any crowdfunding website.

Risk 1: Default of the project owner

At present, there are some overseas crowdfunding sites that are trying to replicate their business model in Singapore. In the case of equity crowdfunding sites, one of the main risks investors must be aware of is the potential of suffering loss of capital when a project fails. In reality, business ventures fail more regularly than most of us realise. So the question is \u2013 what is the failure rate of new ventures like?

Based on an article on Forbes.com, it was reported that the failure rate of new businesses could be as high as 80%. This means that 8 out of 10 new businesses are expected to close within the first 18 months. Hence, this is a statistic that funders should be aware of before they embark on any crowdfunding deal.

Risk 2: Illiquidity of crowdfunding deals

Another risk is the illiquid nature of crowdfunding deals. Due to limited or no secondary market, funders typically have a hard time finding potential buyers if they wish to sell their stakes mid-way.

Apart from the lack of avenue for funders to sell their shares, a main reason for the small secondary market is due to stakeholders according different value to the shares. While this may not be a problem for deals that are backed by physical assets, it is quite hard to ascertain the value of start-ups, especially when they do not have steady revenue or any assets. Therefore, those who enter into crowdfunding deals, especially equity ventures, should be mentally prepared to hold onto their investments for the long haul.

Risk 3: Risk of platform failure/ insolvency

Based on the International Organisation of Securities Commission (IOSCO), the financial returns from the crowdfunding market is currently worth more than US$1billion in the USA, the UK and China. As crowdfunding gains traction in Asia, many crowdfunding sites have sprung up in the last few months. While CoAssets has been around for almost 1\xbd years and it is already generating some revenue, there are many new entrants without a clear niche or sustainable business model.

As the industry matures, some of these unsustainable crowdfunding sites would inevitably shut down. At present, causalities have started to surface in places like the US and UK, and some of the recent sites that have shut down include ProFounder.com and BuyABeerCompany.com. Hence, those unfortunate few who used these platforms would have the unpleasant experience of suffering some financial losses.

Risk 4: Risk of Fraud

As the online environment allows users to remain anonymous, users should also be aware that online crowdfunding sites are exposed to the fraud risks. A case in point would be Bubble and Balm, a fair trade soap company that raised \xa375,000 from Crowdcube, a UK based crowdfunding site. In 2011, Bubble and Balm offered 15% of the company\u2019s equity to 82 investors, who contributed between \xa310 and \xa37,500 each. About 2 years later, the business unexpectedly closed down overnight. While Bubble and Balm might not have started out as a fraud per se, investors were left high and dry with no means of contacting the business owners. As a result, the affected parties were unable to recover their investments and suffered financial losses.

Hence to minimise the risk of fraud, users would want to see what are some of the preventive measures that the platforms have in place before they proceed with a deal. For example, to safeguard funders\u2019 interests, only licensed developers, licensed agents and property owners (with title or proof of purchase), can put up deals on CoAssets. While it does not mean that fraud will never happen, such measures will significantly reduce such risks.

Conclusion

While crowdfunding seems to be a new concept, many people do not realise that it has been around for some time. In fact, one of the earliest crowdfunding exercises happened in 1885. Back then, the New York state Governor and US Congress were unwilling to fork out US$250,000 (around US$6.3million at today\u2019s price) for a granite plinth for the Statue of Liberty. It was only after Joseph Pulitzer, a renowned publisher, ran a fundraising exercise via his newspaper were the necessary funds raised.

Ultimately, that is what crowdfunding stands for \u2013 using technology to empower everyone with the ability to financially back a project or cause that they support in any part of the world. And that, to us, is an exciting prospect of what crowdfunding can become.

That said, we are still in the early days for the crowdfunding movement. However, people are gradually become aware of the potential it holds. Just as Amazon, eBay and PayPal was viewed with much scepticism when it first started, these sites have become household names. Hopefully, the same can be said about crowdfunding websites and such sites will one day be an integral part of the Internet ecosystem.

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