Andy Field: Hello everybody. Welcome to the GECA podcast, Crowdfunding Chronicles. Brought to you by the Global Equity Crowdfunding Alliance. I’m your host, Andy Field. Today’s episode is all about understanding the risks associated with running a crowdfunding platform and crucially, whether those risks are insurable.

So as the crowdfunding industry continues to grow and evolve, Platform owners are facing unique challenges, including differing regulations across jurisdictions that can complicate operations. So to help us unpack these issues today, I’m joined by a special guest, Richard Austwick, the original director at BMS group, Richard’s got extensive experience in working with crowdfunding platforms, helping them manage and mitigate their risks through specialized insurance solutions.

So Richard, welcome to the show. It’s fantastic to have you here.

Richard Austwick: Thank you very much. Yeah, really. I’m excited to speak to you.

Andy Field: Brilliant. Okay, so should we start with the basics? So crowdfunding platforms have become a vital part of the financial ecosystem. We all know that. But [00:01:00] what are some of the key risks that platform owners need to be aware of?

Richard Austwick: Yeah, so good question. So I think ultimately it kind of depends on the individual platform and where they’re domiciled. But I think there are definitely some broad, exposures that affect all types of businesses, all types of platforms. So you can have some of your trading exposures. So, you’ve got your, your investors, you’ve got the potential for fraud to happen, whether that’s the employees or third party manipulations.

you’ve got from the investor side, the actual failure of investors, a failure of the investment, sorry. as an exposure, then you’ve got other risk exposures. If you look at your sort of financial exposures, so running, running a platform, you know, running a business, running a P and L managing that cashflow, trading conditions, pressures from shareholders, pressures from any, any clients that you deal with.

So that, that’s another type. And then the other one, which I guess is the, it was a rapidly, developing area is the regulatory exposure. So how [00:02:00] you are dealing with the regulator, The communication with the regulator, with the, with the regulators, you know, how you’re tracking that it’s, you know, the, the really key point is trying to marry growing your platform whilst also ensuring that the compliance and the internal controls and procedures are really sort of, staying in line.

I think that’s a, that’s a real balancing act for platforms.

Andy Field: Yeah. So that’s, I mean, I to sum that up, then I suppose that, running and owning a platform comes with all the risks that any other business would potentially have, plus some really nuanced ones, you know, associated with the actual fact that it’s a, it’s a crowdfunding platform.

So, so given that wide range of risks that you’ve talked about there, how, just how insurable are those risks for, for platform operators? Can, can they actually adequately protect themselves through insurance?

Richard Austwick: Yeah, it’s a good question. And it’s always something to start off with when you speak to clients is actually just having a clear conversation at the start and just say, okay, you’ve got your balance sheet of risks.

[00:03:00] And what are those, what are those risks you’re most concerned about? And what can be transferred off your balance sheet via insurance and what can’t? And I think once you start at that point, and then move on from there, that’s a better position to start from. So if we, if we take that regulatory exposure.

So if you’re having to deal with a regulator, so you can get cover for, you know, if, if the regulator starts to investigate the platform in terms of procedures, it’s, AML, KYC provisions, so you can get access to, legal costs who can help represent you if the regulator comes in and starts a formal investigation.

Often those situations people won’t really know they might have lawyers that they deal with but are they specialists in this area? So you want to get access to someone who knows how your local regulator acts, the kind of information they want, how they want to be presented, so that that’s a really key point.

and then , other things we just talked about, you know, the, the other risk exposures on the balance sheet for these crowdfunding platforms. So you’ve got that [00:04:00] financial element. So the actual personal assets of the directors themselves.

So those guys, those individuals who are running the business, it’s their own personal assets liable if things go wrong. So often you can transfer that off from a director’s and officer’s liability policy, which, is really important. And then if we go back to the original point on trading exposures, so the investors, the performance of the investments themselves, you know, if the, if the investments fail and investors lose money, they start, they want, essentially they want their money back.

And so they try to seek recourse. And so you can get the, under the professional indemnity section of a policy, you can get that protection. If you start getting investors start to make complaints against you. And particularly if they feel that. You’ve missed something. You’ve, you’ve, you’ve, you’ve missed something in your due diligence.

You didn’t make something as clear, as clear as possible. But we often find that and just on that, you know, the, the modern world in which we work in, you know, that the rapid escalations of investors [00:05:00] sort of working together, you know, that, that, that happens quite frequently and it’s sort , the other side of technology, you know, all the positive sides, but actually it can come full circle when you’ve got investors actually on WhatsApp groups, Facebook groups.

Google ads, you know, they’re, they start to appear above you as the platform and your own website. So they’re all, they, all these risk exposures can be transferred, transferred off our insurance.

Andy Field: Wow. And then just thinking out loud, really, I think you’ve covered kind of most of the things that I would immediately think of would be an exposure.

But what about things like, reputational risks? So, so for example, if, a story hit the news and obviously you needed to hire some, some PR people to mitigate that, is that kind of thing, can that kind of thing be covered? Yeah.

Richard Austwick: Yeah. So, yeah, again, so always good just to start from the base layer and then work up from that work from there.

So these policies. They’re, they are a, they’re a shield, not a sword. So they are to protect the company and the directors. They don’t allow you to go after third parties, but they [00:06:00] allow you to get defense costs. So particularly, for example, if your platform is sort of hacked into by, an erroneous third party, and all your systems are down, all your investors can’t, buy or sell or any of their investments, then there’s that real potential for some PR damage.

So under, for example, cyber insurance policies, you get access to PR costs. So if you’ve got to go and tell key third party suppliers, whether they’re investors, but something’s happened, you want to do it on your terms by doing on your terms, you help mitigate something potentially larger happening.

Andy Field: Yeah, that, that makes sense.

well, so, so we touched on earlier, platforms potentially operate, operating across multiple jurisdictions. It’s one of the things that GECA is obviously advocating for. That is our sort of our sole focus is to make, equity crowdfunding truly borderless. So how do the varying regulations across different countries or, or even regions actually affect the risks that platform owners face?

What, what do they need to be [00:07:00] mindful of in that respect?

Richard Austwick: It’s a good question and it’s something that is, you are seeing, like with most things there is a lot of development. So you are seeing a lot of regulators, talk to each other. You know, there is a lot more sort of on a wider basis, a lot more conferences where people are sharing best practices, best experiences, which ultimately is probably a positive thing.

So whether you are UK based or whether you are Europe, you’re, you are based in Europe or America, you know, the way technology works, you know, you can have meetings virtually so. There’s a much better share of information, from that, from that sort of side. I think the key with all these things is the local knowledge.

So if you’re setting up in a new territory or setting up in your own territory, it’s understanding that local, having that local understanding. So, you know, whether that’s from a legal point of view, from a risk point of view, from a tax point of view, just really getting that sort of clarity early doors.

So that , when you open up a new territory, you guys know, You know what you’re going to be facing and dealing [00:08:00] with early doors rather than further down the line and being on the back foot

Andy Field: from the offset. Yeah, that absolutely makes sense. So yeah, I mean, that’s a really good point. So so to give everybody listening a clearer picture of some of the things that we’ve talked about and some of the actual that can happen.

Could you have you got any examples of claims that you’ve seen from from crowdfunding platforms or anybody in the crowdfunding industry, actually, and and more importantly, probably how did insurance help in those cases in those examples?

Richard Austwick: Yeah, sure. Yeah, I know. Yeah, they are. They tend to be more interesting.

I think people can relate. I’ll talk about some examples where I think people can relate to them more. So we already are speaking to a lawyer last week and we were talking about this and they were like, Oh, that’s so interesting. You know, that’s kind of, that’s what I’m interested in some of that. So yeah, absolutely.

So I think, you know, You know, we’ve, we’ve been operating in the crowdfunding space for myself about seven years. So we’ve got some pretty good data and that helped us launch the European product because we had a lot of proprietary data on claims to really present to insurance. And just our comments [00:09:00] to claims example in a minute, but one insurer actually said when we approached them said, Oh, maybe we’ve missed, misinterpreted crowdfunding as a sector because we thought it was maybe higher risk than it was.

So once you present that data, you know, and that was really, you know, good point, you know, have that data and to be able to, to make progress. So, yeah, the first one I’d probably talk about is, is related to the directors themselves. So this is directors running companies. So running the actual platform crowdfunding platform.

And We had a client that was, had accusations from one of its shareholders, but the directors weren’t running the business. They weren’t running the business in the interest of the business, they were running it in their own best interest. So they weren’t finding their fiduciary duty.

A lot of that is sort of allegations. And so there’s allegations need to be defended against. and the matter actually was first discussed back in 2019. Like with this particular case, the time it takes [00:10:00] to reach a conclusion was a long time. So actually took five years to conclude because you had legal lawyers on both sides battling You know, it was, yeah, it was quite a lot.

Andy Field: Which instantly says to me, five years worth of legal costs. Wow.

Richard Austwick: Yeah, yeah, exactly. And so the the total end amount that insurers paid out under their policy was just over four million pounds. and yeah, and that was And, and the benefit of that was that the shareholders share at the start, the founders basically said, okay, we’ll agree to transfer our shares over to the shareholders and we’ll kind of call it, we’ll draw a line in the sand.

But actually the shareholders in this situation went beyond that and went after the personal assets of directors. So if you imagine you’re running this, you’re running a crowdfunding platform, and you’re, you’re faced with a situation, and actually it’s not just your equity in the platform itself, it’s your own assets, you know, any property you’ve got, car, et cetera, stuff like that.

Andy Field: So I think, I think there’s going to be people out there who, who probably aren’t aware of the fact that those personal assets, you know, are at risk in this kind of [00:11:00] situation and need to be protected.

Richard Austwick: Yeah, exactly. And so this will depend on,territory to territory in terms of the local sort of environment from a legal perspective.

But yeah, it’s something that I think people probably aren’t aware of, you know, and, but it’s, you know, it’s really important just to transfer that risk off the balance sheet. you know, covering your personal assets and get that, get transfered over. So yeah, yeah. 4 million in total, you know, it’s a significant amount.

And, and the time length, the other, the other claims much shorter, and slightly more wide, I guess, more in the more modern environment. So we had one platform where, someone was able to get into their systems and we’re basically watching how the CEO and the CFO were talking. So watching how they spoke to each other, the mannerisms they used, you know, the type of language that they were, they were using to each other and they didn’t do anything.

They just sat on it for two or three months, watched, watched and learned. And then eventually they sent an email, to the CFO saying the [00:12:00] CEO, well, the CEO sent an email to the CFO saying, Oh, the. The bank account details, of, one of the companies looking to raise money has changed. And what happened was two transactions totaling about half a million were transferred into the wrong bank account details into these into the fraudsters details, hugely stressful time.

We were able to utilize the insurance policy to, you know, cover that loss. So the half a million loss and crucially do it quickly and early because in that situation, if it had rumbled on and on. You would have had investors start to really get concerned about what’s going on. And then you’ve got all their legal costs that you might have to factor into in terms of settlement.

So dealing with early doors really sort of helped actually keep the total loss at a lower level. And then initially from that, they had regulatory obligations to notify their local regulator that something’s happened. And so there might well be something to follow from that. [00:13:00] yeah, further costs from that side.

Andy Field: I mean, yeah, eye opening and eye watering examples really. And, and I guess, yeah, they really do show how critical insurance can be in protecting platforms from, look, let’s be honest, that could potentially be catastrophic financial losses in that.

Richard Austwick: Yeah. And they were, They were in the startup phase, you know, they were probably, probably year two.

So, you know, huge, well, would affect any, any business, but yeah. Particularly those at that size.

Andy Field: Oh, goodness me. So, you’ve, you’ve touched on this earlier, but based on your experience, how should crowdfunding platforms approach risk management when they are operating in those multiple regions?

Is there anything sort of specifically, I mean, obviously, other than the fact that you’ve said that, you know, get the local knowledge early, that, That makes sense. Is there anything else you could, you could, um, pick up on that?

Richard Austwick: I think it’s probably a case of when they’re planning and mapping out their roadmap.

So whatever stage they’re at, whether the, you know, year one or whether they’re in year three of [00:14:00] a five year plan, it’s trying to then integrate that into what is the, what’s the proposition for our insurance. And that probably seems quite low down the list, but if you’re looking to set up a new territories, you want to make sure that your insurance policy.

And your insurer is comfortable with that. And they’re able to provide cover as you go. What you don’t want to be doing is spending all this time setting up a new territory and then finding out, Oh, actually my insurer actually can’t, can’t cover me for activity in a certain territory. So really aligning that strategy as early as possible is really important because then that just means you’ve got peace of mind of knowing, Oh, I’m with this insurer.

They know that we’ve got plans to expand into X, Y, and Z. They’re comfortable with that. And it just, it just, it’s something that you’re probably going to be pretty stressed and you know, you’re probably pretty busy of your time and it’s something you can just tick off and focus on your, on your other.

Andy Field: Yeah, and probably one of those things that you, you know, it’s very easy to almost forget about the need to do it. To do that, you know, so yeah,

Richard Austwick: I don’t, we don’t take it personally, [00:15:00] you know, often insurance probably isn’t probably, you know, in the top five or top 10 things, but it is something that people need to consider.

And yeah, so .Yeah, getting that, discussion in early doors is really, really important.

Andy Field: Brilliant. So that’s great. And, and look, that’s been really, really useful and really, really interesting. We’ve, we’re running out of time. Before we wrap up on this, have you got any practical tips that you can offer platform owners that will maybe help them better manage their risk generally and ensure that they’re adequately covered?

I mean, we’ve, we’ve talked about so many different scenarios here today, so it’s going to be difficult for you to go through those individually, but just general sort of tips to help them better manage their risks. That’ll be great.

Richard Austwick: Yeah, sure. So I think the first one kind of linked to my previous point is just invest the time early doors to make sure you’re speaking to specialists who have been on the journey of other platforms.

They know they know what’s going to go on, because it just means that you can sort of get this done and move on to [00:16:00] your other points on the agenda. And generally speaking, you know, insurers work on their generally conservative nature. So if they don’t have certain information, they will always act on the side of caution.

Yeah. So we always say get on the front foot. So we do quite a big, due diligence exercise before we engage with insurers, because we know what insurers, the information they want. And if you get on the front foot and you present it in the right way, then You give insurers the comfort to really put their best foot forward.

And that’s what you want. You want them to say, actually, they’ve, they provide this information on XY. Because of that, I can, I can actually offer a lower premium. So spending that time to start with specialists just saves you a lot of time and money in the long run, from that sort of side. And, and as I said, the very point, very, very first point is.

I guess having a conversation with, with who your insurance broker is actually, you know, what risks are actually in my transferring off the balance sheet of the business for insurance? And what actually am I not? Because I think once you start from that position, you’re, you [00:17:00] have it, you have better clarity in terms of what you are covering and what you’re not.

Cause I’m sure there’s people who get frustrated and think, you know, am I actually being insured for, I want to be insured or, or, you know, likewise, and, you know, in terms of exclusions or restrictions and coverage.

Andy Field: Yeah, yeah, I mean, that makes perfect sense. Listen, Richard, thank you so much for sharing those insights.

It’s, it’s obviously clear that when running a crowdfunding platform that there are significant risks, as there are with most businesses, actually. But the good news is that the risks are insurable with the right approach. And actually, as you mentioned there, if people take the time to actually do that initial, you know, help your broker, the initial fact find, if you like, can sort of reap rewards in terms of what you’re covered for.

And then obviously the premiums obviously can be can be, can be looked at as well, in, you know, in, with more information. So I guess it’s all about understanding the specific challenges of the industry and being proactive in managing them. So yeah, that’s fantastic. I mean, for our listeners, if you’re involved in, in operating or investing in crowdfunding platforms, this conversation should have [00:18:00] hopefully highlighted just how important it is to have a solid risk management strategy.

Your insurance broker can obviously help with that. Insurance can play a massive part in ensuring that platforms can survive, actually, when things go wrong. So, Richard, I just want to say thanks again for joining us today. I’m sure we’ll talk again, in the future. And thank you again for our listeners for tuning in to Crowdfunding Chronicles, the GECA podcast.

Please stay tuned. We’ve got more episodes on the way soon where we’ll explore the opportunities and challenges involved in shaping the crowdfunding, world. So, look out for the next episode soon. And bye bye for now. Thanks again, Richard.

Richard Austwick: Thanks, Andy. Cheers.