You’ve heard of crowdrise, AngelList, and perhaps you recently invested in a new tech gadget on Kickstarter. But the concept of equity crowdfunding isn’t as simple as clicking a button and investing in a start-up. Simply put, equity crowdfunding is the exchange of a piece of a company for cash.
Recently, the SEC1 released the equity crowdfunding law, Regulation Crowdfunding. The law permits individuals to invest in securities-based crowdfunding transactions with some limitations including:
- the amount of money an issuer can raise using the crowdfunding exemption;
- imposes disclosure requirements on issuers for certain information about their business and securities offering; and
- creates a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions.
One particular challenge presented by this form of funding is that unlike companies raising capital through traditional established channels, many of the issuing companies raising money through crowdfunding have little or no track record. Although they can present exciting growth opportunities for investors, these issuers can also expose investors to unknown risks particularly around the probity of their current and future governance. The key was to build trust in the ecosystem.
Reading about this growing industry, Monica Tigleanu, Senior Underwriter, Commercial Institutions, and Fred Ling, Financial Institutions Practice Leader, EMEA, became interested in the opportunities for insurance that the crowdfunding industry might offer.
"Through discussions with the industry stakeholders, […] we realized that the industry would benefit if we could protect investors from issuer fraud – a major concern not only for the investors and platforms, but also the regulators," said Monica.
A high profile case in the U.S. emerged where an oil and gas company called Ascenergy raised $5 million from crowdfunding platforms. Around $1.2 million of that was then spent by the founders on non-business items, as well as payments to other companies owned by the founders. In late 2015, the Securities and Exchange Commission froze the assets of the company for fraud.
"This made us realize that issuer fraud risk was a proven risk we could protect against," said Fred. "But it wasn't simple as there are multiple parties participating in the contract: the policy is bought by the platform, it protects the investors, but the fraud event would occur within the company that receives the investment."
Monica and Fred were able to get buy-in from senior members of AIG's global financial lines team for their new product including Irwin Goldfarb, Chief Underwriting Officer, Commercial. They then reached out to crowdfunding platforms across the UK and Europe and found Eureeca, a Dubai-based platform registered in the UK, who were interested in the solution and were open to collaboration to develop a bespoke product.
"Thanks to the partnership with Eureeca, we were able to conduct due diligence on their business model and their investment guidelines to better understand the risks that were taken in identifying investment opportunities. That meant we could price the risk and validate the coverage," said Fred.
Crowdfunding Fidelity was recently launched, and Eureeca is AIG's first policyholder. "The product gives us a great connection to these growth stage companies as it aligns our strengths and customer centric values," said Monica.
"Crowdfunding Fidelity is a great example of how AIG learns together with the industries and clients it serves to better meet their strategic needs. We are looking forward to building similar relationships with other platforms across the world and to expanding our offering to this sector," said Lex Baugh, President, Liability and Financial Lines.
The content contained herein is intended for general informational purposes only. Companies and individuals should not solely rely on the information or suggestions provided in this article for the prevention or mitigation of the risks discussed herein