Considering the Risk Factors in Crowdfunding

Mar 21, 2018 9:35:29 AM / by Eduard Tee, COO | 3 minute read

Everyone who partakes in crowdfunding is looking for ways to minimize the risks associated with crowdfunding. But how do you do this? In what way can you influence the risks of making a bad investment?

On this page you will find information on the following topics:

  • The choice of a platform 
  • Obtaining a license
  • Analyse available information
  • Monitor how much you invest
  • Spread your investments

 

The choice of a platform

The Dutch crowdfunding market is a mixed situation with a lot of different crowdfunding platforms. The platforms range from big, reputable, internationally operating platforms to small organisations with only a few projects running.
Within the financial industry, crowdfunding is a growing market and laws and regulations are still being developed. The Dutch Financial Authority (Autoriteit Financiële Markten, AFM) and the Dutch Central Bank (De Nederlande Bank, DNB) try to adapt the current laws and regulations to better fit their supervisory function by making them more clear and uniform.

In the current situation, crowdfunding platforms are regulated with different standards for internal processes, governance, information to the crowd, employees, etc, depending on the type of supervision that is applicable to the platform. On a more abstract level, the main differences between the platforms are the following types:

  • Crowdfunding platforms with a crowdfunding-exemption (which lets a company trade in repayable funds)
  • Crowdfunding platforms which are licensed (for example, those with a broker-license)

Platforms that are licensed by the AFM are more strictly regulated compared to those that are operating under an exemption. The license-holding platforms have extra requirements concerning their processes, responsibilities, documentation, employee credentials and reporting standards. 
On the AFM website you can find which platforms operate with an exemption and which are licensed. Click here for the downloadble-overview (website in Dutch). There is only a handful of companies that have obtained a license of which Lendahand is one of those companies.

Regarding obtaining a license

Obtaining a license is a lengthy process. Everything about the crowdfunding platforms needs to be thought out and written down meticulously. This process can take approximately two years. Once the license has been provided, the platform has to meet very strict requirements concerning:

  • Information provision to the investors
  • In what ways the platform ensures the safety of funds of investors
  • Regulation of internal processes
  • Information provision and timing to the AFM and DNB
  • The platform’s employees
  • Financial health of the company

Obtaining an exemption is relatively easy compared to getting a license. This is of course the main reason why it’s called an exemption. Therefor, most of the Dutch platforms operate based on an exemption. It is unclear for how much longer this will be the case, as laws and regulations are becoming more strict. The evolving requirements will affect all platforms, including those working with an exemption.

Licensed platforms seem to be best prepared for the future.

 

Analyse available information

Lastly, it is important to carefully read the provided information and analyse it well. Who is the loan’s counterparty? Is it a start-up? An experienced entrepreneur starting something new? Is it a mature company looking for a new credit line?
Also look at the financials. Does the business plan make sense? Are the numbers realistic? Maybe it’s worth it to do some additional due diligence through Google? So, make sure you actively inform yourself with the provided material and be critical of the information that is being served to you. 

 

Monitor how much you invest

The AFM advises investors to invest less than 10% of their investment capital through crowdfunding. We mention this advice from the AFM to our investors as well.

 

Spread (the wealth)

And finally, the most important advice is that when you have decided on investing: spread. Make sure that the investments you do, are spread out over multiple projects with multiple risk-profiles, multiple platforms and other diversifications that you can think of. Do not go all-in this one investment-opportunity that seems to have a good interest rate. Take all other aspects into consideration and make sure to create a well-balanced portfolio. 
As a starting point, you could take a look at the projects at the Lendahand-website to determine with what project you could start and how you can diversify your Lendahand-portfolio with other projects.

 

Topics: crowdfunding, diversification

Eduard Tee, COO

Written by Eduard Tee, COO

I think it's important to be able to work with people who are trying to achieve a common goal, a unit in which everyone has their role. I see the role of Lendahand in society as people make clear that financial returns and helping others go very well together.

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