International Organisation of Securities Commission (IOSCO), a body of market regulators across the world including Sebi, has called for greater regulatory checks on 'crowdfunding' investment products to avoid any potential systemic risks in future.
Taking cue from financial market regulators in the US and the UK, India has also begun looking into a possible framework for 'crowdfunding', an emerging way for raising funds by pooling money from people through Internet.
While it is still in nascent stage in India, compared to large markets like the US, China and the UK, the trend is catching up fast especially in the wake of emergence of social media as a key platform for such activities.
Crowdfunding typically involves young entrepreneurs and small groups of people raising funds for their ventures through various online platforms. Of late, such platforms are also being used for launching products that promise certain financial returns to the contributors.
In a new report, the research department of IOSCO, of which Indian capital markets regulator Sebi is a key member, has said that the 'financial return crowdfunding market' has doubled year-on-year for the last five years to an estimated $6.4 billion in 2013.
This has been mainly driven by annual growth of 90 per cent in peer-to-peer lending.
"Peer-to-peer lending has spread across the globe, making FR crowdfunding a global phenomenon. The equity crowdfunding market is more modest in size and has grown at a slower pace," the IOSCO Staff Working Paper report said, while adding that the views are of its Research Department and do not necessarily reflect the views of IOSCO or its members.
Crowdfunding is an umbrella term describing the use of small amounts of money, obtained from a large number of individuals or organisations, to fund a project, a business or personal loan, and other needs through an online platform.
Financial Return crowdfunding is a type of market-based finance that could help stimulate economic recovery by channelling capital to small and medium-sized enterprises (SMEs). However, FR crowdfunding poses many risks and raises an array of investor protection issues, the report said.
The report also said that challenge facing regulators and governments around the globe is to strike a balance between encouraging crowdfunding and mitigating the risks associated with it while protecting investor interests.
While this market does not pose a systemic risk to the global financial sector at present, various factors could modify this outlook in the future.
"With the next evolution of this industry being in the global nature of funding sources, the challenges ahead will include cross-jurisdictional contractual and legal harmonisation, dispute settlement and resolution issues," it added.
