Understanding crowd investing: roles, risks and structures
Crowd investing enables many investors to participate jointly in financing projects. Although the term is frequently used, the underlying structures, roles and risks remain unclear to many. However, a basic understanding of these elements is crucial in order to be able to realistically assess offers.
The roles involved – There are three key players in crowd investing
Investors provide capital and bear the economic risk of the investment. They decide independently whether and in which project they invest.
Project initiators (also known as issuers) raise capital to finance a specific project, such as a real estate project or company growth.
Platforms act as intermediaries. They provide the technical infrastructure, organise the investment process and ensure that the information required by law is made available, without themselves providing any financial guarantees.
Typical structures and instruments
Crowd investing is carried out using various financing instruments, such as loans, subordinated loans, bonds or equity models. The instrument used has a significant impact on investors’ rights, the ranking in the event of insolvency and the type of potential returns. Regardless of the instrument, however, crowd investing is generally a long-term investment and cannot be compared to the flexibility of traditional bank deposits.
What are the risks?
Crowd investing involves risks that cannot be eliminated by regulation. These include, in particular, the risk of a project failing, delays in repayments or the complete loss of the invested capital. Even though regulatory requirements create transparency, they are no substitute for economic analysis. Investors are always responsible for their own investment decisions.
Regulated, but not risk-free
In Europe, crowd investing is subject to clear regulatory frameworks. These primarily govern processes, information requirements and investor protection at a formal level. However, they do not guarantee the economic quality of individual projects and offer no guarantees of returns or repayment. Regulation creates structure and comparability, not security in the economic sense.
Distinction from crowdfunding
The term crowdfunding is often used synonymously in everyday language, but originally referred to other models, such as donation or reward-based financing without a financial repayment claim. Crowd investing differs in that investors expect a financial return and take an economic risk. The conceptual distinction helps to classify expectations realistically.
Crowd investing can be a useful addition to the financing mix and to one’s own portfolio – provided that the underlying roles, structures and risks are understood and consciously taken into account.
