IOSCO Issues Report on Risks and Benefits of Financial Return Crowd-Funding

IOSCO published a Staff Working Paper titled Crowd-Funding: An Infant Industry Growing Fast, which provides a global overview of the crowd-funding industry, along with a mapping exercise of the global regulatory landscape. The purpose of the report is to identify investor protection issues and to determine whether crowd-funding poses a systemic risk to the global financial sector.

The report analyzes financial return crowd-funding (“FR crowd-funding”), which refers to peer-to-peer lending and equity crowd-funding. According to the report, the main challenge facing regulators and governments is determining how to encourage crowd-funding, while also mitigating the risks associated with its growth and protecting investor interests. 

The working paper identifies the main benefits of FR crowd-funding as follows:

  • it provides a boost to economic growth through flows of credit to SMEs and other users in the real economy;
  • it fills the credit gap left by banks;
  • it offers lower costs for capital/high returns, leveraging off a lower cost basis; and
  • it provides a new product for portfolio diversification.

The main risks are identified as:

  • risk of default;
  • platform risk;
  • risk of fraud;
  • risk of illiquidity; and
  • risk of investor inexperience.

The report concluded that the FR crowd-funding market does not present a systemic risk to the global financial sector at present, but the challenges ahead will include (i) cross-jurisdictional contractual and legal harmonization, and (ii) dispute settlement and resolution issues.

See: IOSCO Report.

 

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