Global body reviews “an infant industry growing fast”
By Crowdfund Vibe Staff Writers
Crowdfunding can stimulate economic recovery by channelling capital to small and medium-sized enterprises (SMEs) according to a report issued by the Research Department of the International Organization of Securities Commissions (IOSCO).
Their report identifies benefits and risks, particularly in the area of investor protection. It advises that governments around the world will have to harmonise their regulatory approaches to an increasingly global industry. In doing that governments and regulators will need to strike a balance between encouraging crowdfunding and mitigating the risks associated with its growth.
The report reviews both peer-to-peer lending (crowd-lending) and equity crowdfunding (crowdinvesting), and provides key insights on the main implications for users. This is the first publication of its kind that ties together a global overview of the industry together with a comprehensive profile of its regulatory landscape in 13 IOSCO member-countries. (This includes the Pacific Rim countries of Australia, Japan, New Zealand, South Korea, Ecuador, Canada & the USA.)
While crowdfunding markets are small, they are growing fast. Driven by annual growth of 90% in peer-to-peer lending, the global crowdfunding market has doubled year on year for the last five years to a estimated $6.4 billion in 2013, according to IOSCO. The worldwide equity crowdfunding market is more modest in size and has grown at a slower pace. While the current market size is too small to cause systemic risk, IOSCO consider it has the potential to grow to a sizeable market in a short period of time.
The report highlights this new source of funding fills a credit gap left by banks following the global financial crisis. It provides a boost to economic growth through flows of credit to SMEs and other users in the real economy. It offers lower cost of capital/high returns – through a lower cost basis – and provides a new product for portfolio diversification.
The authors also note that “the focus of policymakers and regulators on growth and funding of the real economy means that this segment of the financial industry has the potential to develop into a credible investment option for sophisticated and retail investors alike.”
The report states there are risks that need to be addressed – which include the default or business failure, platform closure, platform concentration, retail investor inexperience, illiquidity of investments, fraud and cyber-attack.
The IOSCO report concludes that at present the crowdfunding market does not present a systemic risk to the global financial sector. It suggests that various factors could change this outlook in the future. “With the next evolution of this industry being in the global nature of funding sources, the challenges ahead will include cross-jurisdictional contractual and legal harmonisation, dispute settlement and resolution issues” the report identifies.
In recent years IOSCO has adopted a strategic approach whereby it promotes national securities regulators to identify, monitor and manage systemic risks. Through this report, and its role as a global standard setter for securities market regulators, IOSCO is clearly positioning itself to coordinate regulators to respond to the development of this fast growing industry.