May 24, 2016, Wall Street Journal announced that AIG would cash in on a new market by offering insurance for platforms offering equity based crowdfunding investment. Since the JOBS Act passed and most of the wrinkles have now been worked out of it – at least to the point that it “went live” on May 16, 2016. But don’t get ready to celebrate just quite yet. The whole process of equity crowdfunding in the United States is wound up in enough regulations to make a file the size of a New York City phone directory.
Crowdfunding Insurance addresses one of the areas where the SEC might have left enough wiggle room for problems to arise is in the matter of equity crowdfunding investor security. Equity crowdfunding portals are required to purchase fidelity bonds of at least $100,000. However, these bonds primarily cover the portal from first person losses arising from things like portal employees stealing cash or securities that actually belong to the crowdfunding companies. It does little or nothing to protect investors or even companies should the portal engage in fraudulent activities or have some other lapse in sound financial practices. In such a case, the small companies and their investors alike could wind up losing a lot of money. While this might be a point at which one could simply say, “Let the buyer beware,” because everyone knows that investing in marginal sorts of stocks is always risky, there are those who would truly like for equity crowdfunding to succeed. The question becomes whether this new type of insurance would help with that, or whether it is just a way for insurance companies to make more money.
AIG, American International Group, Inc., has spotted the legislative gap in equity crowdfunding insurance and has pounced on it as a business opportunity. They are calling their new insurance “Crowdfunding Fidelity,” and it is designed to protect investors who are active in equity crowdfunding ventures. A spokesperson for AIG noted that there has, so far, been little or no fraud involved in equity crowdfunding, but added that the business model was still very much in its infancy. AIG is not the only company to hop on this particular bandwagon. At least two other insurance companies, Innovation Insurance Group, LLC, and API Particeep (from Britain) are also offering equity crowdfunding insurance. No doubt other insurance groups will soon follow suit as equity crowdfunding becomes more widespread. So far, twelve states have enabled intrastate equity crowdfunding, and eleven more are in the process of putting legislation in place for it.
How will it all work? That is an exceptionally good question. Although crowdfunding has had its share of disasters and also its share of silly season investments, overall the whole concept seems to work very well, thanks to grassroots support. Some people are pointing accusing fingers at AIG, saying that the company and others like it are simply capitalizing on people’s fears that this new type of investment opportunity could open doors to a variety of fraudulent practices. The SEC has done a masterful job of balancing investor safety against the need to nurture a way to foster business ventures that could potentially encourage financial growth in all sectors. Since the fidelity bonds create top-down protection for the platforms, it only makes sense that there should be some bottom up insurance, as well.
AIG and the other insurance companies might be hopping onto this insurance gap as an opportunity. But as they used to say in the Old West of the United States of America, where there’s smoke, there’s generally some sort of fire. Fraudulent activities are not the only reason that investors might want a little extra surety when going out on a limb financially speaking. The crowdfunding community has been watching the equity crowdfunding legislation with baited breath for the last four years. Perhaps it should come as no surprise that folks are just a little bit nervous about the whole thing. But if equity crowdfunding can be made to work in the United States, as it has been shown to work in other countries, it could potentially be a way to encourage small business opportunities. Small businesses have a tough time under any circumstance – and that, alone, could be a good reason for a little bit of insurance to cover these investments.
No doubt the coming months will reveal the good, the bad and the ugly about crowdfunding insurance and about equity crowdfunding, and even about AIG’s Crowdfunding Fidelity. Although the general concept of equity crowdfunding is not completely new, it is new to the United States. We live in exciting times.