'Crowd-funding’ could threaten financial system
“Crowd-funding” projects that attract investor return need urgent cross-jurisdictional regulation, an international regulator believes, with nearly half of the ventures defaulting.
A review of the business model found crowd-funding does not pose any significant threat to financial stability at present, but “rapid growth in the future could change this”, the International Organization of Securities Commissions (IOSCO) said.
The newly-popular mode of sourcing equity - under which a large number of small investors pool their funds, often online - has numerous economic benefits, including stimulating the growth of small- to medium-sized businesses, IOSCO said.
In the last five years, the crowd-funding market has almost doubled year-on-year, according to the report.
But IOSCO said the unregulated model carried extremely high levels of risk, with default rates for equity crowd-funding estimated to be around 50 per cent, and peer-to-peer lending topping 30 per cent in 2009.
Other risks included fraud, illiquidity, cyber-attacks and collapse, though there had only been one reported case of a platform closing completely.
In the post-Global Financial Crisis era, it was irresponsible to let these risks endure without cross-jurisdictional regulation, the report said.
The coalition of regulators stressed it was well-positioned to further investigate potential threats and crowd-sourcing in relation to international law in the future.
AUTHOR
Kate Cowling
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