Crowdfunding has been around for a while, but in the world of finance, fundraising using online platforms is fairly new. For this reason, rules and regulations to govern it have not been clearly defined and therefore, a lot of the campaigns happen with barely enough supervision to minimize the following risks associated with Crowdfunding:
o A lot of donors are just average people. They are not subject matter experts and might be ignorant on the processes that go into various projects
o Since the companies are small and private, or probably not even registered, then audited company accounts as well as business plans may not be available to allow them to find out more about the company.
o Crowd funders give small dollar amounts and thus are not particularly bothered by the returns, they write it off as soon as they give the money
o There is a free-rider problem where everyone thinks that others have carried out due diligence whilst in essence no one has.
The Crowdfunding industry will need a lot of regulation to minimize the above mentioned risks. However, many governments are town between regulating the industry, by leaving it as it is, or over regulation that will end up killing the innovation that has been borne by this wild finance market that it is. One thing is for sure, whether the governments choose to regulate it or not, we must be aware of the risks before embarking on Crowdfunding either as a backer or as a creator. Now that you know the risks, consider yourself saved.