Informational asymmetry between issuers and investors is a significant risk factor in investment-based crowdfunding. Crowdfunding issuers often consist of small businesses in their early stages with minimal track records, which in turn restricts the availability of information. Unlike public companies, small businesses typically do not disclose information as regularly or comprehensively, nor are they typically obligated to undergo independent audits of their financial statements. Consequently, consumers investing through crowdfunding platforms are likely to have considerably less insight into the issuer's prospects compared to the issuer's management or owners, especially when contrasted with other forms of public securities offerings.
Unlike publicly listed companies subject to stringent disclosure requirements, SMEs raising capital through crowdfunding platforms may provide limited or incomplete financial information, making it difficult for investors to conduct thorough due diligence and assess the underlying risks. This lack of reliable information can lead to mispriced investments and increased vulnerability to fraud or misconduct. More+
When information regarding an issuer is challenging to access or its quality is uncertain, investors face the risk of making uninformed investment decisions. Unlike publicly listed companies, whose valuations are determined by market-driven prices, valuing small private companies can be significantly more complex, increasing the risk of investors overpaying, especially given the inherent investment risks involved. The potential for losses associated with inadequate information is magnified for retail investors, who may lack the resources necessary to gather and analyze issuer information before investing or to effectively monitor issuers post-investment.
Moreover, since the majority of crowdfunding investors typically hold smaller, non-controlling stakes in issuers, the issuers themselves, including their controlling stakeholders, may not perceive the need for transparency. This could lead to situations where capital is utilized to finance riskier projects not initially disclosed to investors.
