Crowdfunding and buyback options There is no doubt that the crowdfunding industry has disrupted the traditional market once dominated by the financial giants. By missing out the “middleman”, costs have been kept to a minimum, transparency to a maximum and companies are now raising significant amounts of money. However, whether you are looking for straight forward company investment, loan funding or a hybrid of the two, there are risks involved. Interest rate reflecting risk The rate of return offered by those looking to raise funds will reflect the risk/reward ratio often taking into account what is known as a bad debt premium.
This means that investors will be compensated for higher risk loans and straightforward investments with higher potential returns. If there were not varying degrees of risk then there would not be varying degrees of potential return. This is the beauty of the crowdfunding industry, the massive variation of investment opportunities available to investors. Financial checks The reputation and integrity of not only individual crowdfunding companies but the industry as a whole is reflected in the quality of investments offered to investors.
As a consequence, crowdfunding companies will carry out significant due diligence before allowing investment by their members. This then brings us on to the subject of a secondary market and a buyback option on troubled investments and potential defaults. Buyback option Here at Crowdestor we stake our reputation on each investment offered to platform members. As we mentioned above, there is a degree of risk associated with any investment otherwise returns would be minimal. However, we are very keen to back-up our in-depth due diligence with a buyback option in the event of an unlikely default. This buyback option needs to be considered against the degree of risk taken with any investment and the timescale.
In order to maximize the financial security for Investors in case of default by the Borrowers, CROWDESTOR has decided to introduce a New Program called 'Buyback Guarantee Fund'.
The aim of the Program is to safeguard the Investor's proper return in case the Borrower is subject to default. The Program will operate as follows:
- CROWDESTOR makes an initial investment in the Buyback Guarantee Fund an amount of EUR 50,000.
- Since 1st of March 2019, CROWDESTOR is devoting a commission of 1-2% from each project that is funded via CROWDESTOR Platform into the Buyback Guarantee Fund.
- We expect to reach the pool value at EUR 100,000 by the end of 2019.
- In case of a default of Borrower, the Platform will compensate all Investors, in a proportionate amount, according to Distribution Rules of Buyback Guarantee Fund, their contributions to the particular project.
- The current standing of funds available in the Buyback Guarantee Fund at any given time will be published on the website.
In summary, the Buyback Guarantee Fund will operate in a roughly similar way to the Deposit Guarantee Funds of credit institutions operating in the EU Member States. While being a start-up crowdfunding entity, CROWDESTOR constantly strives to offer to its client's various instruments aimed for improvement of the Investors' risk standing in an overall balanced and structured approach.