The Big Problem Equity Crowdfunding Platforms Face

The Big Problem Equity Crowdfunding Platforms Face
Posted on January 7, 2014 by Michael Ibberson Updated January 7, 2014


Equity crowdfunding platforms encounter several challenges. The SEC knows this better than most, but there are more than just regulations standing in the way of this industry. While investors and project creators must tread carefully when raising capital, the many portals online face several obstacles of their own.

Once such challenge has been called the “Due Diligence Dilemma.” In the US, most equity crowdfunding platforms have a very low project acceptance rate — anywhere from 1-5% — meaning that portals must perform a substantial amount of due diligence in order to approve only a handful of applicants per few hundred. While this, in itself, poses a great amount of work, the real trouble may lie in the illusion of safety that results.

Portals with very low acceptance rates appear as the smarter investment compared to those with lenient filters. If investors believe that portals have done the due diligence for them, they may feel less inclined to conduct research themselves. Although this will not be a concern for seasoned investors, it’s a problem for those entering the market for the first time. If start-ups on a portal fail, investors may blame the website for their losses, generating poor publicity, which, in crowdfunding, is a huge deal.

On the flip side of things, portals may find difficulties raising awareness for certain campaigns since many start-ups try to hide from the public while in a volatile state. Although this would inevitably lead to the campaign’s failure, it’s still a situation portals and crowdfunders must both consider before moving forward. Determining the readiness of a given project will be important as competition between platforms increases.

Since reputation plays such an important part in a portal’s success, attracting investors who will put these worries to rest is paramount. Finding the balance between a healthy start-up and investor population is not so easy, however. Without a large population of investors, crowdfunders see no chance of success, and without enough lucrative projects, investors look elsewhere. As equity-crowdfunding portals scan more and more traffic to achieve this balance, things may get overwhelming. How they handle their due diligence under such circumstances will become a leading factor for industry success.

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