Crowdfunding: Is policy needed?

The digital world is creating new forms of funding (equity or lending-based models), especially those being offered by fintechs (financial services and technology companies). In addition to these hybrid forms built around equity-based funding (crowdinvesting) and lending-based funding (crowdlending), there are also financing models on offer whose funding structures focus not so much on monetary components, but on non-financial and emotional aspects (reward-based models), or donations (donation-based models).

The essence of crowdfunding seems simple: Usually, in order for a project to be realised, a minimum amount is set in advance to be raised within a predetermined period. If this amount is not raised, the crowdfunders get their money back. The opportunities afforded by such models include wider participation with a broad range of small investors, and cost and efficiency benefits for both parties. Possible risks include a lack of transparency in the project information, and the ease with which small investors agree to invest due to the small amounts usually involved.

In crowdinvesting, several people join together – “the crowd” – to invest collectively in a project company, mostly startups. Usually, investors can provide an amount of their choosing and, in return, have a share in the profits and benefit from any increase in project value. Besides receiving capital, startups funded via crowdinvesting platforms receive publicity, marketing tools, and a large number of active supporters. The crowdinvesting market was last regulated by the Retail Investor Protection Act (amendment to the Capital Investment Act).

In crowdlending, “the crowd” lends capital to a project’s initiators, who then generally have to pay back the money. This personal aspect has also led to the term “peer-to-peer lending” – or “person-to-person lending”. The lending usually takes place completely online and utilises digital technology in order to optimise the costs and benefits for both parties, so that companies and private individuals can obtain favourable loans and investors can earn attractive returns.

Over the last few years, crowdfunding has become an increasingly popular form of alternative finance and investment. Given the long period of low interest rates, small investors in particular are tempted to try out such new forms.

The SVRV report “Crowdfunding: Is policy needed?” was presented to the public on 7 July 2016.