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Diversification key to crowdfunding

Education about crowdfunding investments will be the catalyst for a sustainable market, particularly around limitations on amounts and an emphasis on diversification.

“The models need to have some level of regulation, but the best way to ensure protection for new investors, including SMSFs, is to make sure they diversify,” VentureCrowd chief executive Jeremy Colless told selfmanagedsuper.

“I don’t think you want to stop people from taking risk, but you also need to educate the public.

“So if they want to invest in risky asset classes, in order to mitigate risk you need to use some sort of investment strategy, be it diversification, be it keeping the illiquid parts as only a small portion so that it’s a balanced portfolio.”

Some form of limitations would also assist, Colless said.

“A restriction could be that a retail investor can put no more than x dollars into any one deal, so that we’re embedding some good investment strategies,” he said.

“That’s very difficult, but I think that would be the best system – let them pick and choose whatever they want, give them some sort of limits and encourage them to diversify.”

In May, crowdfunding platform VentureCrowd unveiled a new subsidiary that enables eligible investors to build a portfolio of properties online without the middleman.

VentureCrowd said it believed the service would be attractive to younger SMSF investors with 20 to 40-year investment horizons.

Colless said its crowdfunding model sat somewhere between direct investment and managed investment schemes (MIS).

“Direct investment has usually been for investors with larger balances who also have time to do all the work themselves, and then there are MISs or venture capital funds, which you have to pay big fees for and there’s no choice,” he said.

“But I think the movement towards SMSFs and choice will continue to grow and the tech-savvy younger investor with the long-term horizon is the most likely early adopter of crowdfunding techniques.

“That’s how I visualise it becoming an important piece to the investment sector and something that all financial services participants, be they banks, brokers or property players, need to be aware of and have a strategy around it.”

VentureCrowd has received interest from a broad range of industry participants, including brokers, property developers, investment banks and financial advisers.

“Even the more proactive superannuation funds, who want to participate in the SMSF market, are considering it from the point of view that if crowdfunding does become more mainstream, what competitive threats, risks and opportunities it presents,” he said.

“So they’re trying to understand what their strategy should be. It’s on their radar.

“Lots of them are thinking about what the future looks like, especially as the total number of SMSFs continues to increase.”

In August, the government released its consultation paper, “Facilitating crowd-sourced equity funding and reducing compliance costs for small businesses”, as part of its legislative framework to facilitate crowd-sourced equity funding for public companies.

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