Equity crowdfunding had always posed as a risky means for struggling startup businesses or a financial threat.
As US policymakers determine the potential outcome of equity crowdfunding, the Rotman School of Management in Toronto produced a research paper aimed at helping them approach the most positive conclusion. The paper will be included as a chapter in the up-coming volume of Boston’s National Bureau of Economic Research.
“There's no question that there will be fraud and that some investors will lose money, but that's true in every market,” said Ajay Agrawal, an associate professor of strategic management at the University of Toronto's Rotman School of Management, who wrote the paper on the topic alongside Christian Catalini, a Rotman PhD student, and Avi Goldfarb, a professor of marketing. “This is a new market and we suspect there will be a steep learning curve for all participants: entrepreneurs, investors, crowdfunding platforms and regulators.”
From disaster relief to artist works, many are using non-equity crowdfunding to help grow their projects. There are currently more than 200 non-equity crowdfunding platforms. Often they allow people to utilize the Internet to garner small contributions in the form of donations or in return for a reward.
“Our objective was to put some structure around this innovation in financial markets,” said Agrawal. “It's not often that we get a chance to speculate on the advent of a new market. It's exciting.”
Currently only accredited investors are allowed to raise business capital using the platform. US regulators are working carefully in an effort to open the market to anyone. In 2012, the Obama administration introduced Jumpstart Our Business Startup Act, but regulations from the Securities and Exchange Commission is still pending.
In order to reduce potential risk, the paper says that entrepreneurs using equity crowdfunding will have to address costs for fraud, incompetence and creating unrealistic goals.
“It feels like we are being far more protective of people making mistakes buying small amounts of equity through crowdfunding than we are of people making mistakes buying other goods and services on the Internet that are sometimes fraudulent, of lower-quality, or overpriced,” said Agrawal.