A brand new crowdfunding insurance product has the industry talking, but questions remain how effective the product will be.
Earlier this week, AIG released Crowdfunding Fidelity, an insurance policy for crowdfunding platforms. Although a new concept, the motive behind the product is very simple. Crowdfunding investment is risky to start, but headline-grabbing frauds are making people even less likely to invest.
Crowdfunding Fidelity isn’t available directly to investors — crowdfunding platforms that meet AIG’s due diligence standards can apply for coverage. So far, only Eureeca, a crowdfunding site active in Europe and Asia, offers Crowdfunding Fidelity to the participants on its platform.
What is crowdfunding insurance?
Investors don’t need to opt in to the insurance plan when they invest via Eureeca — the insurance comes packaged with every investment. Companies raising capital end up footing the bill and the cost is bundled in the fee they pay Eureeca to fundraise.
Once covered, investors are protected from fraud for only the first year after the shares are issued, with an additional year of “discovery” to allow for investigation of fraud. The current coverage cap is limited to $2 million, well above the amount most small businesses raise through crowdfunding, but not high enough for large crowdfunding ventures. In the event of fraud, the investor is returned his original investment.
The most interesting part of the coverage is when the policy kicks in. Currently, the policy covers catastrophic theft that leads to bankruptcy. It appears minor fraud, like petty theft, wouldn’t be covered. Obviously, fraud is a risk that any investor takes when making investments, and this further shifts the responsibility crowdfunding platforms have to properly educate their investors.
First mover advantage
Industry experts have long suggested a form of crowdfunding insurance and Eureeca should be commended for its collaboration with AIG. “AIG chose our global operating model as a guide in the development of the product to boost its potential for scale,” said Eureeca’s co-CEO Chris Thomas in an email to Tradestreaming. By opening up the hood to its systems and providing data to product developers at AIG, Eureeca plays a big role in getting crowdfunding insurance off the ground.
Fraud insurance for crowdfunding platforms seems like a great idea, but it will be interesting to see how insurance policies change over time. Will the 2-year period be enough time to uncover fraud? Will limiting coverage on fraud that leads to bankruptcy really satisfy investors’ concerns?
Perhaps the changes will not come so quickly, as crowdfunding platforms take a “wait and see” approach to insurance. But what if changes start sooner rather than later? Will platforms find themselves in need of an insurance broker? Will marketplaces raise due diligence minimums? Will startups be forced to disclose more to crowdfunding platforms?
Only time will tell if the assurance-of-insurance eases investor worries and increases the long-term success of crowdfunding.