IOSCO Highlights Investor Risk in Crowdfunding

IOSCO highlighted major crowdfunding risks and urged regulators to consider measures to address them. In a survey and report issued by the Committee for the Regulation of Market Intermediaries, IOSCO stated that "crowdfunding regimes are in their infancy" and "IOSCO has not proposed a common international approach to the oversight or supervision of crowdfunding at this stage."

Based on the results of its survey, IOSCO emphasized the following crowdfunding risks:

• Heightened financial risks: A high risk of default or failure is often associated with startup businesses.
• Fraud, money laundering / terrorist financing: The risk of fraud may be higher in cases of online private offerings.
• Platform Failure: There is a risk of platform failure or closure for crowdfunding portals.
• Illiquidity: In most cases, no secondary market for crowdfunded securities exists.
• Suitability/Information Asymmetry: A crowdfunding offering may not be suitable for all investors, since many investors lack experience with these types of offerings and may not be able to carry out sufficient due diligence because of a dearth of appropriate skills and/or a significant information asymmetry between the entrepreneur and the investor.

IOSCO also recommended that regulators and policymakers take note of the following measures undertaken to address major crowdfunding risks:

• customizing the entry and registration of licensing requirements for funding portals;
• settling disclosure requirements for issuers and funding portals;
• limiting the services that may be provided by crowdfunding platforms;
• requiring investor education and/or statements signed by investors acknowledging their understanding of risks;
• limiting the size of the investments made by an individual in each offering and in a given timeframe; and
• requiring the appointment of a third-party custodian to hold investor assets.

IOSCO also encouraged regulators to consider the possible cross-border implications of Web or mobile platforms that are used in crowdfunding.