After getting involved in conversations about crowdfunding (crowd investing) platforms and principles of their operation, most often you get to face questions of safety and guarantees. Some FinTech industry expressions still are new, and precaution of people is completely understandable, however, risking sounding banal, I will note that time is money and dedicating a few minutes to the explanatory information could be worth.
Safe as in the bank! I can’t say for others, but at least I, looking back at the history of financial industry and its zigzags, both in domestic and international context, can hardly understand, how someone could think of such saying, where word bank is used as a symbol of a perfect safety.
Decisions regarding money, whatever they are, always assume a risk – higher or lower possibility that a specific step made by you will bring loss instead of profit.
This time, I will focus on basic principles of crowdfunding and what for a prospective investor can mean financial manoeuvres on platforms of this specific type.
However, since this FinTech expression, amongst others, is being constantly compared with wealth increase possibilities offered by banks, I would like to clear one thing at once:
- If storing money in the bank in principle is an expectation game, where you hope to receive profit from financial market fluctuations favourable for you, which nowadays for receiving profit are mostly too slow and ultimately fruitless, crowdfunding platforms invite you to more proactive, determined actions, offering much more tangible and timely opportunities for profit in return.
- Crowdfunding platforms urge you to take over control of your finances and multiply your prosperity, replacing the customary passivity – saving in a sock – with thought-out but decisively active actions with your money.
According to a relatively recent research, one of five European residents have used services provided by modern financial technologies companies (FinTech) within the last two years (2015, 2016).
And you just have to not be frightened and to get to know operation and practice of local crowdfunding platforms, in order to understand that the digital Internet technology aspect in all this means no additional risks of losing money or being cheated. This is a possibility of additional earning and multiplying of your prosperity.
Investing ot putting in a sock?
First of all – how, in fact, crowdinvesting works.
Nearly each of us has registered on and more or less actively uses at least one social network. Basic tasks of such platforms are letting you access and share information, communicate with other users, as well as providing entertaining possibilities.
Crowdfunding platforms in the Internet browser environment basically work according to an almost identical principle – you create your profile (account) on any chosen platform managed in the Internet browser environment and receive a possibility to get involved in one or more products offered on it by investing your assets.
About reasons to dispose of my money in exactly this form I already have extensively told in previous publications, however, for the sake of clarity, I will shortly recall them again:
This is a relatively simple and, as it will be further ascertained, safe way to receive profit by using a part of financial assets freely available for you.
Instead of keeping money in the bank (traditional deposits), where it cannot evade the tooth of inflation, and receiving a mere half per cent annually in return, simultaneously agreeing to possible risks of a financial crisis now and then shaking the world, such platforms offer an opportunity to use some of the savings to receive higher and faster profit from projects of relatively high profitability that have not been available to wide public before.
Besides, crowdfunding platforms give an opportunity to have a part in development of the environment, municipal infrastructure, since a significant part of projects in their essence are relatively small, local scale initiatives, representatives of which could hardly attract attention of conventional investors.
Can the law safeguard my money in the Internet?
How transparent after all are projects, their representatives, who have chosen such platforms for attraction of investments, and platform providers?
The most efficient explanation, I think, will be a specific example here in Baltic States.
Estonia-based crowdfunding platform Envestio having in its portfolio the whole spectrum of projects, both real estate and power production, and even cryptocurrency projects, is a supporting member of the European Crowdfunding Network, ECN.
ECN operates as an industry’s self-regulation organization, main objectives of which are raising of professional standards, promotion of transparency and assisting in development of respective mandatory legislation of the European Union (EU). It is represented in the European Crowdfunding Expert Group Forum in the European Commission.
If we talk about the legislation directly concerning operation of crowdfunding platforms, the current situation in the EU is characterized by conditionally different regulations developed by each country’s legislators.
For instance, in Germany retail investors (a term describing crowd funding platform investors) are protected from doubtful companies and offers by the Retail Investors Protection Act (Kleinanlegerschutzgesetz).
In France, specific regulations applicable to crowdfunding platforms have already existed since 2014 and, according to the ECN, they have had not just protective, but also considerable positive influence on the industry in general.
Important example is Denmark, where, according to report of The Danish Growth Fund (Vækstfonden) and Danish Crowdfunding Association (Dansk Crowdfunding Forening), in 2015-2016, involvement of public in crowdfunding projects have grown by 250% compared to the previous year. However, companies that offer investing are currently subject to the existing legislation – specific regulations developed for crowdfunding services do not exist yet, but the responsible Ministry has let know that creation of regulations for the FinTech industry and facilitation in operation of the industry representatives is included in its agenda.
Similar situation is in the Baltic States, where existing legislation is currently applicable to this industry, however, according to the ECN, EU executive power has given clear indications that already in the nearest future development of joint EU legislation applicable to the crowdfunding industry will have priority.
Going deeper in this, you will soon have to understand the self-evident – financial industry comparable to the Wild West, full of security holes and lacking any regulation will not be allowed to exist in the European Union, at the tip of the nose of its biggest institution, executive power (European Commission).
You also have to understand that one of the main reasons why people are worried about both crowdfunding platforms and the FinTech in general… is the fact that addresses of companies in this industry usually start not with a street name, but rather with www.
Whether it is not historically that one of main reasons why we trust the bank with our life savings is an opinion that we can walk through the door at any time and make sure that everyone is here that everything works?
Branches of brick and mortar type are not characteristic of crowdfunding and it makes us distrust it, while many of us are ready to give almost all our personal information to Facebook without a second thought, not even talking about private photos and correspondence. Have any of us been in Facebook office? Isn’t it a little paradoxically?
I will continue by adding that investors who wanted it, have met Envestio management, as well as have visited its projects. Crowdfunding companies are fully aware of the public attitude and, in fact, are doing quite much to dispel distrust rooted due to their reliance upon Internet technologies in daily provision of services related to the financial sector.
Speaking about banks again, I should mention the obvious – banks, too, include in their services more and more advantages provided by digital technologies characteristic of the FinTech industry. Internet banks, contactless payment cards, use of smartphones for making payments, two-level authorization…
I invested, but now I have a second thought and want my money back…
Speaking about safety of the invested money and withdrawal guarantees, for starters it is necessary to explain two terms. Estonian Envestio currently offers projects of two types – secure debt and subordinated debt.
- Secure debt means that the project representatives/owners not only provide full information about a specific company and conclude necessary agreements, but also provide the investment platform with additional guarantees, e. g., mortgage.
- Necessary agreements between project developers and the crowdfunding platform are also concluded in the subordinated debt projects, as well as all related financial and legal information about the project is provided, however, additional guarantees are not provided.
Whether a specific project is qualified as a secure debt or a subordinated debt project is clearly mentioned in the project description.
Withdrawal guarantee means that any investor at any time can sell the investment from their investment portfolio back to platform and immediately receive money to their investment account.
Since the money collected by the platform is a specific share of total funding attracted to a specific project additionally to the bank funding, Envestio is sufficiently funded to allow withdrawal at any time. Withdrawal costs are calculated and shown on Envestio member’s personal desktop.
An example of how withdrawal guarantee works in a secure debt project can be seen in the previous article here: “Envestio Bayback Guarantee”.
Simultaneously, it must be accented that, regardless of the project type (secure or subordinated debt), crowd funding platforms carefully verify each investment project owner, making sure that the insolvency probability in each specific case is negligent.
Last but not least – your first step in the world of investments may be as big as you want, or, in other words – crowdfunding platforms offer various minimum amounts of investment to participate and ascertain how pleasant, unpleasant, sufficiently or insufficiently transparent is this process in your opinion.