Crowdfunding: Rapidly-Expanding Industry with Poorly-Managed Risks

Crowdfunding is rapidly expanding and so are the risks that go along with it.

As 2016 comes to a close, crowdfunding—which had been very lightly regulated—is becoming a major concern for industry professionals, public authorities and insurers.

Crowdfunding refers to raising money through donations, equity investments, or loans to finance artistic, humanitarian, social, or entrepreneurial projects.

According to the Good Morning Crowdfunding[1] site, the total amount collected was €296.8 million in 2015: €50.2 million in donations, €196.3 million in loans, and €50.3 million in equity investments. Numbers for 2016 will likely surpass these results.

However, crowdfunding by loans or capital investments still carries risks for all parties involved.

  • Unlike Angel Investors, amateur investors and the “apprentice loan officers” may lack experience in analysing the maturity of projects that are often in the start-up phase and run the risk of losing all or part of the capital they have invested or lent.
  • The project owner, as well as the internet platform, risk having the funds they’ve collected misappropriated. For example, the Swedish platform TrustBuddy, a pioneer in the industry, was the victim of a fraud scheme in excess of €4.7 million in 2009.


Regulatory Mechanism for a Mechanism That’s Moving in the Right Direction

In the face of growing potential risks, crowdfunding regulation is evolving in several ways.

First, in the area of oversight: the Sapin bill adopted on 30 March 2016 expanded the AMF Enforcement Committee’s jurisdiction to regulatory breaches likely to occur as part of crowdfunding.

Second, in the area of risk: the 28 October 2016 decree, part of the “Macron reform” significantly revamped crowdfunding regulations. The contribution cap was raised from €1,000 to €2,000 for interest-bearing loans and from €4,000 to €5,000 for non-interest-bearing, while increasing a project’s maximum financing from €1 million to €2.5 million per year.


Questions Remain Regarding Crowdfunding Platform Responsibility

Finally, in the area of risk insurance: the 30 May 2014 no. 2014-559 court order, which went into effect on 1 July 2016, requires crowdfunding platforms, intermediaries and their lawyers to take out professional liability insurance, mainly to cover monetary risks: misappropriation of funds, platform bankruptcy, insufficient project information or lack of information, etc. However, Good Morning Crowdfunding’s investigation in July 2016 revealed that only 15% of platforms would have purchased public liability insurance.

So, this raises the question of crowdfunding platform responsibility for insurers: are they responsible for project selection, especially in the case of manifest fraud or nearly immediate default after borrowing? What about financing requests made in the guise of a project that turn out to be nothing more than emergency cash loans?

[1] Cited by ACPR (French Prudential Supervision and Resolution Authority) as an information source on crowdfunding


Finance and Services Loss adjuster – GM Consultant Group