What are the legal dangers of crowdfunding

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Crowdfunding can benefit both borrowers and donors. It is an additional opportunity for companies to close funding gaps and test their projects on the market.
Donors can specifically support interesting ideas and projects, even those in which private investors have so far not been able to participate.

However, there are also risks associated with this form of financing. Therefore you should consider the following:

  • You are not investing in the platform, but in the project of a third party that the platform has included in its offering. Advertising, professional presentation and confidence-building measures by the platform operator as an intermediary should not obscure the fact that you have to place your trust in the project initiator. This applies in particular if the platform assigns independent ratings for projects that it regularly has a commission-related interest in realizing.
  • A total loss of the invested money is possible. With the subordinated loans that are often offered in crowdinvesting, your capital can also be used to prevent the total loss of other creditors. The company can refuse the repayment and interest payment if this would trigger a reason for bankruptcy. In other words, a company can consume all of its subordinated capital before it even has to file for bankruptcy. If the supported company or project stalls or fails, in the worst case scenario you will lose all of your deposited funds. With start-up companies in particular, the risk of bankruptcy is greater than with companies that have already established themselves in the market.
  • As an investor, you generally have no say in the matter. This means that you put your money at the disposal of the company in a manner similar to that of a partner, without receiving legally comparable rights to information or control. In contrast to a partner, you also have no voting, co-determination or instruction rights. Therefore, pay attention to the precise design of the contracts and find out about the respective form of financing.
  • The running times depend on the specific project. Especially with terms of several years, you as an investor should check whether you can actually do without your money for that long. Bear in mind that you can often not exit at all or only at a loss, especially if the borrower should get into a crisis. Find out from the provider under which conditions you can sell your participation.
  • Find out what happens to the money you have invested if the required sum for a project does not come about because, for example, not enough investors can be found. Platforms may withhold a certain amount to cover their costs. As with all investments, you should get an overview of the cost and fee structure of the respective offer.
  • Be aware that most crowdfunding platforms do not require BaFin approval, but mostly act as financial investment brokers within the meaning of the trade regulations. These offers can therefore be assigned to the gray capital market. Investments in the gray capital market are not associated with a greater risk per se. They are by no means dubious per se, but unfortunately it is also made easier for dubious providers to sell their products or to embezzle deposited funds. In addition, providers on the gray capital market are not subject to statutory security schemes.

Before making an investment decision, you should carefully weigh up the opportunities and risks associated with it. If you do not receive clear and specific information despite questions and your own research from neutral and trustworthy sources, you should be particularly attentive and careful. It is your responsibility to choose a product that corresponds to your personal risk tolerance and your investment goals. You should pay attention to both the form of financing and the investment property. In particular, when making your decision, you should not only compare different crowdfunding projects with one another, but also consider other forms of investment.

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