The International Organization of Securities Commissions (IOSCO) on Monday published the results of a recent survey into the phenomenon of crowdfunding, and a statement on regulation in this fledgling fundraising niche, stressing the need for investor protection in this space.
It is “important for regulators and policy makers to balance the need for supporting economic growth and recovery with that of protecting investors when developing crowdfunding as a means to invest in small firms and start-ups,” IOSCO says in a statement.
Drawing on the findings of its survey, IOSCO aims to raise awareness regarding some of the major risks investors face when investing via crowdfunding. “In addition to common investment risks, such as conflict of interest, data protection and fraud, IOSCO believes regulators should pay attention to the additional risks related to crowdfunding,” the IOSCO statement says.
These risks related to crowdfunding outlined in the IOSCO statement include: default or failure with start-up businesses; fraud, money laundering or other financial crimes that may be heightened in online private offerings; crowdfunding portals could fail; the fact that there is no secondary market for crowdfunding securities; and suitability risks.
The IOSCO statement spells out some of the measures that regulators are using to try to mitigate the risks of crowdfunding, including licensing funding portals; setting disclosure requirements for issuers and portals; and, limiting the size of the investments that can be made via crowdfunding.
The statement also advises regulators to take into account possible cross border implications of their rules. “To mitigate cross-border risks, special crowdfunding regimes often restrict cross-border fundraising by requiring that the issuer and/or the managers running the funding portal must be incorporated locally. Nonetheless, some jurisdictions have considered exploring coordinated approaches with one another in managing both the risks and opportunities related to the cross-border aspect of crowdfunding,” the IOSCO statement says.
In Canada, several jurisdictions have adopted crowdfunding regulations this year. As well a new exemption is set to come into effect in Ontario, Quebec, Manitoba, New Brunswick and Nova Scotia on Jan. 25, 2016, which features measures such as registration requirements for funding portals, investment limits, and other investor protection measures.