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Australian and UK regulators warn on crowdfunding risks

14 August 2012  |  6095 views  |  0 Team meeting

Australian and UK watchdogs have both warned of the potential financial and regulatory risks for participants involved in the fast-growing crowdfunding sector.

Using online platforms and social media to raise funds for business projects - with sponsors getting a return - has proved popular in the US and is now gaining traction in the UK and Australia.

Regulators are moving to clarify their position on the practice, with the Australian Securities and Investment Commission (Asic) writing to several sites to outline their obligations.

Commissioner Greg Tanzer says that crowd funding is not prohibited or, generally, regulated by Asic but "some types of crowd funding could involve offering or advertising a financial product, providing a financial service or fundraising through securities requiring a complying disclosure document".

These activities are regulated by the watchdog and may impose legal obligations on the people operating the sites and those using them to raise funds.

Asic also urges site operators to carry out background checks on project creators and viability assessments of their ideas, to help counter fraud or bankruptcy.

Meanwhile, the UK's Financial Services Authority (FSA) has posted a note on its site warning potential crowdfunding investors that most projects are high risk and they have little protection if things go wrong.

Says the note: "We believe most crowdfunding should be targeted at sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money. We want it to be clear that investors in a crowdfund have little or no protection if the business or project fails, and that they will probably lose all their investment if it does."

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