Investment-based crowdfunding typically involves the issuance of illiquid and hybrid securities, which can exacerbate risk for investors. In contrast to investing in securities listed on regulated markets, where investors typically anticipate the ability to exit their investment by reselling securities on an organized secondary market, crowdfunded securities are seldom traded on any structured market. Even in rare cases where organized secondary trading exists, the depth of the market, and consequently the ease of trading, is often insufficient. Consequently, investors must comprehend and be prepared to acknowledge the risk of being bound to their positions indefinitely (in the case of equity) or until full repayment of the debt (in the case of debt).
Consumers may also lack the experience and expertise needed to comprehend the intricacies associated with the types of securities typically available on crowdfunding platforms. These securities may include hybrid instruments that combine elements of debt and equity or feature restrictions on voting rights, tailored to meet the issuer's requirements. Additionally, crowdfunded securities may come with limitations on their transferability, either as part of a contractual agreement or mandated by law. For instance, in countries like the United States or Australia, shares may only be traded after a specified period, such as 12 months from the date of issuance, with certain exceptions, such as sales to accredited investors in the United States or sales accompanied by a prospectus in Australia. Similarly, in Malaysia, this restriction is typically set at six months. The more complex and diverse the range of issuer rights and investor limitations, the more challenging it becomes for retail investors to grasp the associated risks of investing in such securities.
