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Crowdfunding: the threat for bankers

James Eyers (AFR) | March 27, 2013

iPledg co-founder Andy Tompkins says the crowdfunding business was not possible before the arrival of social media and low-cost payment systems such as PayPal. "Now all of that has come together, crowdfunding is starting to take off," he says. Tompkins, a chartered accountant, emigrated to Australia in 2010 from England via South Africa and became a panel member on the Queensland government's Mentoring for Growth program, where he met many entrepreneurs struggling to borrow.

He met business partner Bryan Vadas on one of the panels and the two launched iPledg. Tompkins says the relatively benign levels of fund-raising in its first year is a function of many projects not using social media effectively and not properly understanding how to structure their rewards. But he expects the market to become more sophisticated and volume to grow.

Not surprisingly, given the combination of fund-raising and the internet, crowdfunding is attracting attention from global regulators and legislators. Last August, the Australian Securities and Investments Commission issued guidance to website operators, reminding them that under Australian corporations law they cannot facilitate the raising of equity capital without a licence.

Neither Pozible nor iPledg has sought to be licensed and the "pledge and reward" models they offer do not require their platforms to be registered with the regulator, as their transactions do not involve financial products as defined by the law.

ASIC commissioner Greg Tanzer, who has been monitoring the crowdfunding market for the past year, says that based on overseas experience the potential for fraud on pledge and reward sites is real and, when it occurs, it is "extremely damaging for investor confidence in the market affected by it".

ASIC says fraud has not been a problem domestically, in the pledge and reward area, and Pozible and iPledg say they are not aware that any fraudulent projects have used their platforms. Both were in close contact with ASIC before the release of the guidance and have been developing processes to monitor and vet projects to ensure the potential for deception of sponsors is reduced. iPledg has introduced quality controls such as requiring photo identification from project sponsors to ensure they are real persons; in addition, to have a project on iPledg, the project creator must have a verified PayPal account, meaning that PayPal has confirmed the user's identity. "It's certainly not foolproof but we're doing as much as we can in terms of checks and balances to avoid [deception]," Tompkins says.

Crabbe says Pozible vets, reviews and performs basic due diligence and, in some cases, gives advice to ensure projects comply with regulations, laws and extensive project guidelines. "We have a responsibility to ensure the long-term viability of crowdfunding for creative projects," he says, "and also for creating a safe and reputable marketplace."

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