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What are the risks?

What are the risks?

There are many advantages to crowdfunding, but there are also potential risks that you should be aware of. This section will help you understand and navigate the potential pitfalls of crowdfunding.

There’s no guarantee you will reach your target

Much like any other business venture, there is a risk of not succeeding. If you do not reach the fundraising target, money collected during your campaign will have to be returned to investors.

Advice: Analyse carefully all possible ways how your fundraising campaign could succeed. If you fail, you can try again; some of the biggest successes tried a couple of times before they found the winning formula. Contractual arrangements should provide clarity on rights and obligations of the parties involved in case funding target is not reached.

Your intellectual property becomes public

Your ideas are online for lots of people to see and there is a risk of someone duplicating your proposition.

Advice: Ask the platforms on which you intend to list; they may offer general advice on protecting your intellectual property rights. Your local Chamber of Commerce or government agency may also be able to help you, but if you are in doubt you should seek independent advice.

Underestimating the costs

It is common to underestimate just how much time and resources crowdfunding takes. Some forms of crowdfunding may create additional costs. For instance, in case of equity crowdfunding, administrative costs may increase along with each issue of shares. You may not have enough capacity to deal with new investors, to provide ongoing information about the project or to process corporate rights of shareholders.

Advice: Be aware of the different steps you need to take, allocate enough time and work out a plan that keeps a margin for error and delay. Remember that you will need to allocate resources for before, during and after the campaign. You might want to ask for the help of legal counsel on legal issues related to crowdfunding.

Reputational damage

The market is now quite competitive and you will likely have experienced investors looking into your offering. Any sloppiness, errors or under-preparation will reflect badly on you and your project or business.

Advice: Make sure that you do your research thoroughly. You will find further resources in the “Next steps” section of this guide.

Advice: Remember that this is a different kind of business venture. You may need to tailor your approach to cater to people who may not be familiar with your sector.

Advice: Make sure you fully understand the crowdfunding process before committing so that you can be sure you are able to deliver what you are promising.

Disclosure and legal requirements

Advice: Always check with the platform and your local supervisory authority what documents you will need to provide and what the costs will be for complying with the requirements, and include this in your cost plan. There might be complex issues to deal with at significant costs, so you might want to ask for the help of a legal counsel.

Law-breaking

The law around crowdfunding is still evolving and so it could be unfamiliar to many. If you do not acquaint yourself with the relevant EU and national laws you could unknowingly breach them.

Advice: Always check the legislation and requirements. Generally the platform offers general advice and points you to the appropriate place for more specialised guidance such as your local Chamber of Commerce, local supervisory authority or the appropriate government department.

Problems with the platform

There may be risk of fraudulent platforms.

Advice: Make sure that you chose established and respectable platforms that have a good track record and no signs of trouble. Aim for those in well-regulated environments, where you are familiar with the legislation and you can be sure that your rights will be upheld.

Issues with responsibilities towards investors and investor dynamics

Dealing with a large and potentially diverse set of backers brings different issues, expectations and demands. Not understanding a contributor’s rights, complaints handling or enforcement mechanisms can create problems, particularly with equity crowdfunding, which comes with some loss of control over your business.

Advice: Research the possible implications and liaise actively with the platform to fully understand your responsibilities. See where the platform can help you and what its role is.

Advice: Before engaging in equity crowdfunding, always think very carefully about potential issues at later stages. You will need to offer investors certain rights to make the investment attractive. Be sure you are aware of what responsibilities these investor rights mean for you.

Advice: Always construct the corporate governance structure and mechanisms in full knowledge of the requirements and obligations. These are complex issues, so where necessary seek the advice of qualified experts.

Investors wishing to exit

One day your investors might want to sell their share, or new investors may decide to join your venture.

Advice: Consider very carefully already at the outset the possible impact on your business of a change or exit of investors and consider asking for legal advice already before offering any equity to investors.

Advice: You will also have to know how to deal with accepting potential new investors in the future, because this may dilute the value of the shares of your original investors.