A new paper discusses crowdfunding’s potential to democratise finance
21 January 2021
The research considers how and why investors place their confidence in commercial crowdfunding websites or platforms
Led by Dr Mark Davis at the University of Leeds, the paper was co-authored by Tim Braunholtz-Speight (Tyndall Manchester) and Robert Ward (University of Cambridge) and is based on research undertaken for the Financial Conduct Authority.
Some people claim that crowdfunding platforms can 'democratise finance', through allowing people more control over where their money is invested. Among other things, it is hoped that this could allow sustainability projects to find investors that they could not otherwise reach.
Other research by Tyndall, published last year in Nature Energy has found evidence to support this claim. That study found that community shares have been an important source of capital for UK renewable energy cooperatives, often at relatively low rates of interest – helping install more solar power.
However, most crowdfunding to date has not been raised for sustainability projects, but for more commercial concerns: personal loans, small business finance, and property development. This new paper considers crowdfunding’s potential to democratise finance by interviewing people who have invested in these more commercial crowdfunding markets. It asks what their motivations and expectations are, how they make investment decisions, and how they built up the confidence to trust these new forms of finance.
The paper finds that many current investors establish trust in crowdfunding through personal connections with crowdfunders, and their prior experience of finance and investing. This suggests that, in these markets at least, crowdfunding tends to be used by people who are already connected and experienced. When less experienced and personally-connected people invest, they often use automated investment options designed by crowdfunding websites: these make investing easier, but reduce investors’ control over where their money goes. To realise crowdfunding’s potential to reach a wider spectrum of people and more genuinely democratise investment decision-making, the authors suggest greater safeguards and protections for investors are necessary.
Read the full paper at the link below: