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Crowdfunding provides new investment opportunities and provides a new product for portfolio diversification of investors. • It increases competition in a space traditionally dominated by a few providers (providing finance to Start-ups and SMEs). • The operators of a crowdfunding platform may engage in vetting or due diligence of projects to be included on their website, to maintain the reputation of the website. Thus, we find an in-built check and balance mechanism in the system. • Crowdfunding is an easy way for an emerging business to garner goodwill and brand loyalty without incurring a high cost. The risks that this model presents to all stakeholders are as follows: • There are some systemic risks which are inherent in the model: First, due to the “individual” nature of crowdfunding, there is a possibility that investors may not practice good diversification principles. Second, there may be no secondary market in which investors can sell their investments and exit and hence, there is a risk of illiquidity. Third, there exists the possibility of money laundering. Fourth, these platforms could expose other financial sectors to the risk of default, as occurred during the subprime mortgage crisis. If the rapid growth rate in P2P Lending continues, these risks could become systemic. Fifth, there are cross-border implications, if the funds are solicited through the medium of the internet, as there exists disparities in the application of contract law or securities law in different jurisdictions. Sixth, there is high chance of information asymmetry associated with these platforms, where one party invests/trades based on some information which is unknown to other set of investors. Since there is lack of hard information, there is too much reliance on soft information based on the social networking platforms in this model, which increases the risks. • The risk of substituting from investment risk to retail risk: currently, the risk in financing start-ups and SMEs are borne by the Venture Capital Funds (VCFs) and Private Equity (PE) Investors. In crowdfunding, these entities solicit investments in smaller sums from large number of investors. Hence, the risk taking by VCF/PE (informed investors) is substituted with retail investors, whose risk tolerance level may be very low, that is
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