TD Economics Report Highlights Struggle For Balance In Regulating Crowdfunding

sonya-gulatiToday TD Economics released a special report on crowdfunding that was championed by Senior Economist Sonya Gulati. The report is a deep, all-encompassing dive into funding for small and medium enterprises from a decidedly Canadian perspective, but the core message is clear and crosses borders: SME’s are starved for funding.

In 2012, the global unmet demand for funding for (all global SME’s) was US$3.1-3.8 trillion, or roughly twice the size of the Canadian economy.

tdThe report cites three figures related to the size of the global crowdfunding market, which is now being placed at somewhere between $3 and $5 billion depending on which report you believe.

Perhaps the most telling stat in the report is based on a survey executed by Ideavibes in partnership with the Canadian Advanced Technology Alliance. Gulati does a great job visualizing the report’s figures.

Gulati also highlights the difficulty in applying appropriate regulation to the crowdfunding space. The report states, “the appropriate amount of regulation can help improve transparency, structure financial transactions and assess the required amount of security in the online transaction.” It’s actually a very balanced viewpoint.

Click here to view the full report

The quick hits from the report are as follows…

  • Crowdfunding represents an emerging financing alternative for startups, micro-enterprises and small
    and medium-sized enterprises (SMEs). It has enormous potential as a source of funding.
  • The internet has seen crowdfunding change from micro-finance and non-profit fundraising campaigns
    into a business financing possibility. A small amount of funds are collected individually from the public (the crowd). Proceeds are then used to fund a project and/or get a business off-the-ground.
  • Several crowdfunding models currently exist including donation, reward, lending and equity; hybrid models across these areas are also present. Underpinning each of these model varieties is the exchange of a financial or non-financial contribution for some sort of strategic value proposition.
  • Several crowdfunding models currently exist including donation, reward, lending and equity; hybrid models across these areas are also present. Underpinning each of these model varieties is the exchange of a financial or non-financial contribution for some sort of strategic value proposition.
  • The global crowdfunding market is estimated to be worth US$3-5 billion, making it a small source of funding today. North America and Europe account for roughly 95% of the market. While data are sparse and mostly proprietary, the market appears to have grown rapidly in recent years.
  • As crowdfunding increasingly enters entrepreneurial awareness, the advantages and challenges of the funding mechanism will need to be addressed. Equity crowdfunding has the greatest challenge, as the transaction is ongoing versus one-time. To address the inherent concerns, regulators in the U.S. and Canada are currently developing a framework of best practices for equity crowdfunding.
  • While effective and enforceable regulation is required, there is a risk of over-regulation especially given the innovative nature associated with crowdfunding. Nevertheless, fraud, information asymmetry and crowd due diligence are structural barriers and risks that must be addressed if crowdfunding is to reach its upmost potential.
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