Equity crowdfunding – a method of funding a company by selling small amounts of equity to many investors via the Internet – is a dangerous game for investors, according to the Canadian Foundation for Advancement of Investor Rights (FAIR Canada).
Comparing equity crowdfunding to “the Titanic heading into iceberg alley,” FAIR Canada said investors are not protected by the usual securities regulations when they participate in this method of fundraising, and that most Canadians don’t understand the risks involved.
“Equity crowdfunding abandons fundamental principles that have made Canadian markets among the most successful at raising risk capital, including full disclosure, due diligence, insider regulation and the role of a professional financial advisor,” FAIR Canada said in a release.
“With crowdfunding, investors send money in exchange for an intangible right — and they will not know what happens to their money.”
Most investments via this method are high-risk speculative investments, the advocacy group said, and not only are returns unlikely, there is a high probability investors will lose their entire investments.
“Many consumers will not understand the high risk of failure and fraud, or the fact that they cannot resell the investment,” the organization said. “They will not have sufficient skepticism of the unrealistic returns touted by promoters – and there will be ‘promoters.’”
FAIR Canada said there are ways for regulators to help limit fraud and potential investor losses, including:
- limiting crowdfunding to projects in which the money will be spend in Canada to fund local Canadian enterprises, with all funds being held in a Canadian bank;
- requiring participants to complete a questionnaire showing they understand the risks involved; and
- setting regulation standards for the portal including fidelity insurance and due diligence on the issuer’s directors, officers and shareholders.
