While we love financial technology in all its wonderful new manifestations, we are VERY aware that it is very “caveat emptor” out there (“LET THE BUYER BEWARE”, as my auctioneer dad used to say to the crowd), and in particular, we would think this would hold true in the new Wild West of finance – crowdinvesting. However, it just ain’t so, according to a new paper published by a professor of finance and entrepreneurship at the Schulich School of Business (Toronto, Canada). n fact, according to his research, there is exponentially less fraud committed in crowdfunding than in publicly listed companies. This is frankly VERY counter-intuitive, and also really encouraging. Check out the links to his paper and background before, and decide for yourself.
“It may be counterintuitive but the research has been done and the results are now in – and it’s as we’ve been saying for almost five years. Fraud in crowdfunding is not just almost non-existent – so much so as to be hard to measure, even proportionally it’s a tiny fraction of the fraud in the city and the mainstream economy . And that’s for a very good reason.
In fact, by the most pessimistic (for crowdfunding) measure fraud is well over 1,000 times less prevalent in crowdfunding than in the traditional economy – among the ‘gold standard’ of the city: Listed companies, regulated by the financial regulator.
In his paper “Disentangling Crowdfunding from Fraudfunding” Douglas Cumming, Professor of Finance and Entrepreneurship and Ontario Research Chair in Economics and Public Policy Schulich School of Business (Toronto, Canada) found that “up to 14% of publicly listed firms engage in fraud each year” while in crowdfunding it is “less than 0.01% of initiated projects per year”.
In the city “this equates to hundreds of billions of dollars” each year – in crowdfunding it is barely measurable, it is so low.
This is counterintuitive.
Almost everyone I’ve met over the last five years have on first encountering crowdfunding said something to the effect of “It will soon be rife with fraud” or “there’ll be one big scandal and the party will be over”.
So why does crowdfunding seem to be repellent to fraudsters and and almost entirely immune to fraud – especially as compared with the city and the mainstream economy…”