Despite the current worldwide economic conditions, innovations continue to happen. One primary reason behind this technological progress is crowdfunding. Broadly stating, startups require a lot of money. However, some entrepreneurs decide to skip the typical venture capital route. Instead, they opt for crowdfunding and trust the public to fund their endeavor. In the central design of business, crowdfunding benefits all parties involved. The company gets the money they need, whereas the investors get early access and discounts for potential products of the company. However, given the trust-based nature of this relationship, it becomes necessary to implement an investor verification solution. This post discusses how a Know-Your-Investor service can help the growth of crowdfunding platforms.
Growing Popularity of Crowdfunding Platforms
Compared to the typical investment, crowdfunding involves and allows the public to contribute a relatively small amount. In recent years, this practice has become a legitimate source of investment as it allows the founders to raise money while building relationships with potential customers. In 2023 alone, the market for crowdfunding transactions is projected to reach $1.14 billion. Whereas, at an annual growth rate of 2.11%, the number will reach $1.23 billion by 2027. Even though standard investments dwarf this number, it still represents a massive opportunity for funding. Moreover, the rapid digitization of global services has introduced many more crowdfunding platforms. Qualified investor verification via a robust Know-Your-Investor solution can help these service providers scale their businesses.
The Need for Investor Verification Solution in Crowdfunding
As discussed above, crowdfunding operates on general trust between founders and the public. Therefore, anyone can invest or donate to the venture via the Internet. Although crowdfunding helps the founder in tough times, it can pose significant risks. Since everyone can invest, criminals can use this gateway to launder their money or for other illicit activities. An investor verification solution becomes necessary in this condition to safeguard the business, genuine investors, and the crowdfunding platform. Here are some associated risks that can occur without using an investor verification solution:
Preventing Fraud and Mitigating Risks
Despite the change in business models, crowdfunding still falls under the scrutiny of financial regulations. However, an unregulated service can allow hackers and cybercriminals to exploit the model. For instance, terrorist groups can use shell companies to transfer black money from sanctioned countries to other regions. Similarly, in the absence of an accredited investor verification service, criminals can find ways to conduct fraudulent activities. Integrating an investor verification solution is ideal for a crowdfunding platform to safeguard its customers from potential security risks. Moreover, it strengthens customer and business trust in the platform.
Ensuring Compliance
Crowdfunding platforms integrate a payment gateway to receive and disburse the money. Since such services are now being used globally, they fall under the jurisdiction of local and international laws. For instance, the Bank Secrecy Act in the US and General Data Protection Regulation in Europe. Similarly, stringent anti-money laundering policies are now in place to keep a check on fraudulent transactions. The platform can be liable if illicit activities occur due to the absence of an investor verification solution. Contrarily, each verified investor strengthens the platform’s reputation and reliability.
Streamlining User Experience
Unlike standard investment procedures, crowdfunding requires a large number of people to send a relatively small amount of money. However, it introduces a limitation in the system. Unless there are enough people, the project cannot take off. On the other hand, if too many people try to onboard simultaneously, the onboarding process can start to lag. After all, time is of the essence in crowdfunding, but a crude platform can add unnecessary friction to the whole process. An investor verification solution can automatically verify each potential investor to ensure timely funding.
Choosing the Right Investor Verification Solution
Crowdfunding is an essential avenue for raising investments. However, the granular system can be tedious if the platform does not utilize a robust investor verification solution. Firstly, the right solution ensures transparency for all parties. Therefore, business owners and investors can have faith in the legitimacy of all stakeholders. On the same note, the solution should be accurate and perform rigorous verification of the individuals. Similarly, it should ensure compliance with regional and international financial laws and regulations.
Summing it Up
Overall, crowdfunding can be the answer to entrepreneurial problems. However, it can be fatal if the platform is not regulated. Regulatory compliance, customer onboarding, and user experience are all affected by poor verification services. An investor verification solution can help overcome these challenges and create a safe environment for businesses and investors.