A new report from TD Economics says that, while crowdfunding could revolutionize the process of funding startups and small businesses, there are still numerous obstacles to it emerging as a meaningful source of financing.
In its report examining the emerging phenomenon of crowdfunding, TD suggests that the approach “has enormous potential as a source of funding”. And, it notes that crowdfunding and traditional financing should not necessarily be considered substitutes for one another. Rather, they should be considered complementary, it says.
“Each financial model serves different clientele and businesses and are used for varying purposes,” it says. “Collectively, adequate access to capital can unlock the growth potential of micro-enterprises and small businesses.”
While various crowdfunding models, such as those that rely on donation, or offer rewards, have their share of advantages and disadvantages, equity crowdfunding faces the “greatest challenge”, the report says.
“Fraud, information asymmetry and crowd due diligence are structural barriers and risks that must be addressed if crowdfunding is to reach its upmost potential,” the report says. While at the same time, it warns that “there is a risk of over-regulation especially given the innovative nature associated with crowdfunding.”
TD notes that Canadian regulators cannot take too long in coming up with their own framework for this new form of financing. “If they do, there is the potential for entrepreneurs and enterprise owners to shift to jurisdictions which embrace crowdfunding. This leads to the potential loss of economic opportunities here in Canada,” it says. “It also reduces the scope for startups and entrepreneurs.”