20 October 2015


The risk the crowdfunding industry must take seriously

Author: Susan Kraemer, Solarplaza

Crowdfunding must act soon to address lack of transparency about professional due diligence, according to Mark Henderson, director of renewable energy debt at Temporis Capital.

"There is the risk that investors assume that the borrower and their project has been thoroughly vetted and is being endorsed by being on a crowdfunding platform,” Henderson cautioned.

“In some cases this may be true, but not in all; ultimately all investors should do their own research."

Millennial-friendly pledge-based sites such as Kickstarter and Indiegogo seem particularly lax on due diligence commitments. Kickstarter, for example, gives issuers pretty much carte blanche in terms of due diligence.

And in some campaigns there is almost a suggestion that due diligence is an afterthought for fuddy-duddies rather than a concept that is central to investing.

A campaign for a ‘solar water maker’, for instance, reads: “Some of our research used for the Water Wasp was published in a key peer-reviewed Desalination scientific journal, please click here for the super-sciency details, if you're into that stuff.”

Such attitudes exacerbate the risk that the lion’s share of solar crowdfunding could wind up going to some fairly half-baked ideas simply because they generate the most enthusiasm on social media sites.

And if some of these projects go sour, there is a further danger that the whole solar industry could be hurt.

One generally perceived risk, that a project might not get all the funds it needs to actually go into business, leaving early investors hanging, is already being lessened by US and European regulations whereby funds are held in escrow until a goal is reached.

But a less easily resolved risk is that any one particular crowdfunding site, no matter how popular today, won't be around to provide income for investors over the entire financial life of a solar project.

"Renewable energy projects last for typically 20 to 25 years,” said Henderson, a speaker at the Renewable Energy Crowdfunding conference in London, UK, next month.

“If the platform is the investors’ agent during this time, will they still be there?" he questioned. "When something goes wrong, who takes charge, who deals with the borrower and will they act in investors’ best interests?"

Some have likened the predictable and reliable cash flow of an operating solar project to that of a toll road. But a disappearing crowdfunding platform associated with it could, even if only by association, damage solar’s reputation as a reliable investment.

Both in European Union and in the US, under the Securities and Exchange Commission (SEC), risk protection for crowdfunding currently centres on the percentage of income that investors may invest.

With this year's finalising of new SEC regulations after three years, varying state laws are pre-empted by one federal law that has greatly simplified US crowdfunding, with some certainty and protection in place.

Issuers will be able to raise capital not just from accredited investors, as in the past, but also from non-accredited investors, who now will be able to invest up to 10% of their net worth or annual income.

This should give crowdfunding a tremendous boost by opening up a potentially wider US market. But it's not going to be cheap or quick money for project owners.

Issuers could spend upwards of USD$100,000 and up to a year on the financial documentation needed for SEC scrutiny.

And even if governments move to cut crowdfunding risk, they cannot always protect against other risk-related actions that dampen appetite for solar.

In the UK, for example, the Trillion Fund recently noted it would no longer be loaning money to renewable energy projects because clawbacks of government renewable incentives government had “rocked investor confidence.”

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