Many companies seeking funding through investment-based crowdfunding are early-stage ventures or small businesses with limited operating histories and unproven business models. In certain jurisdictions, the utilization of crowdfunding may even be legally restricted to small businesses and startups. For instance, in Australia, eligibility criteria mandate that issuers must be unlisted companies with consolidated gross assets and annual revenue not surpassing A$25 million1 (USD16 million).
Such entities could pose as unsuitable and overly risky investments for certain consumers. Limited availability of reliable information regarding their business operations and financial standing, particularly for small or nascent ventures, exacerbates this concern. These investee companies often exhibit higher levels of risk compared to established firms, including higher rates of failure, more vulnerability to market volatility, and susceptibility to economic downturns. Investing in such companies carries inherent risks of capital loss and diminished investment returns. More+
Frequently, crowdfunding issuers are closely held entities, often within a family or a tight-knit group of entrepreneurs. This close-knit structure may lead to a reduced regard for minority shareholders' rights. The risk of minority shareholders' interests being undervalued, disregarded, or diluted is further compounded by the division between ownership and control within the company. In contrast to concentrated holdings typically maintained by founders, the widespread dispersal of crowdfunded holdings can result in significant detachment between crowd investors and management decisions affecting their investments. The presence of numerous small and inexperienced investors, lacking collective influence or effective oversight, heightens the potential for agency risks, moral hazard, and even instances of fraud or misappropriation of investors' funds.
1. Corporations Act 2001 (Cth) (Australia), s. 738G(1)(b), s. 738H.
