Three’s Company… or is it a Crowd?

Remember last summer’s ice bucket challenge… I am certain that if you personally did not take part in it, you absolutely knew someone who did. Whether they dunked themselves in a pool of cold water, or dumped a bucket full of ice over their head, millions of people throughout the country participated in this “dare” to raise money for ALS. Thanks to Facebook and other forms of social media, this became the “in” thing to do for many months.

This sort of “trend” is also known as “C r owd f u n d i n g .” Basically, crowdfunding is organizing a group of investors (usually in very large numbers) to finance a business, non-profit organization, or project as opposed to using typical forms of finance such as banks, bonds, or even stocks. It affords the organization in search of the money the opportunity to raise large amounts of capital extremely fast, and from huge numbers of investors…all without the assistance of investment firms. Additionally, it also allows those who would normally not be involved in an investment such as this (typically due to limited cash availability) to participate and become involved in investments or donations with little cash outlay.

However, what is the “ice bucket challenge” for those involved in this thing of ours, in terms of insuring these types of programs?

As with any business, whether for profit or charity, liability insurance is a necessary cost of doing business. Organizers must consider coverage such as General Liability; Property Coverage (if physical assets are involved), Directors and Officers coverage; Employment Practices Insurance; Excess Coverage; Fiduciary Liability insurance; and most likely some other forms that have not been tested as of yet with a claim.

Typically, your average policy does not cover everything that these types of programs require. For instance, the Securities and Exchange Commission has recently ruled that Crowdfunding groups must secure a fidelity bond with a minimum of $100,000 worth of coverage, stating that a “fidelity bond aims to protect its holder against certain types of losses, including but not limited to those caused by malfeasance of the holder’s officers and employees, and the effect of such losses on the holder’s capital.” However, according to some legal sources, a fidelity bond will insure against first party losses from theft of money, securities or other tangible property. Therefore, if the employees of the organization steal money belonging to the organization, the bond will most likely respond. However, if a negligence claim arises in providing services as a crowdfunding portal, there is no coverage. Therefore, it is highly recommended that crowdfunding groups secure coverage for professional liability along with a bond.

The banking industry also has their own opinions on this subject, and the following are the thoughts of one prominent business person in the financial sector that has been gracious enough to share his thoughts with us. Nadesh Shanmuganathan is the Founder and Senior Partner of Third Eye Solutions, a company providing a suite of lending technology platforms including systems and services for agencies to start and operate their own premium finance, agency bill, and payment plan programs. Nadesh started his career in computer science at IBM’s T.J. Watson Research Center in NY before founding Third Eye Solutions in 2001 when he saw a void for an affordable true real-time internet enabled solution to link agents, companies and a finance company. These are Nadesh’s thoughts on this subject:

Crowdfunding: Possible Disrupter to Financial Services

Allow me to take you on a journey back to July 2014—Germany had just won the FIFA World Cup, the world was anxiously monitoring the Ebola outbreak, and an unprecedented charitable trend was sweeping its way across the globe. I’m speaking, of course, about the A.L.S. Ice Bucket Challenge. A clever conceit combined with a unique marketing campaign led to an immense outpouring of support and almost $150 million dollars raised to benefit A.L.S. worldwide. Never before had a philanthropic cause leveraged worldwide internet connectivity so effectively to generate support from the public and fund its initiatives. The A.L.S. Ice Bucket challenge is a remarkable testament to the effectiveness of crowdfunding.

Although it has only become a prevalent financial tool in the last ten years, crowdfunding is certainly not a new concept. In fact, the concept of crowdfunding — using voluntary contributions from multiple sources to fund a particular project–long predates the internet. The Statue of Liberty is a classic example. In the mid 1880s, after the U.S. Congress tried and failed to raise $100,000 to complete construction of the monument, the newspaper, “New York World” launched a crowdfunding campaign, stating that it would publish the name of every person who donated to the cause. The campaign was an immense success, raising over $102,000 from over 160,000 donors. Nowadays, no one would think to launch their campaign using a newspaper, but crowdfunding still works in largely the same way.

Naturally, the increased prevalence of crowdfunding initiatives is a byproduct of the internet. If you’re a businessperson trying to build an unorthodox product, you may be more likely to find 10,000 like-minded people on an internet forum who support the idea, than you are to convince a ‘by-thebook’ bank representative to take a risk and fund you. Specially designed services like Kickstarter and GoFundMe have greatly contributed to the increased prevalence of crowdfunding as well. These services provide a legitimate platform for individuals to describe their campaigns, outline the benefits of contributing, and collect the funds in a secure manner.

When people typically think of crowdfunding, they usually associate it with consumer products like the Pebble Smart-Watch or artistic endeavors like the Zach Braff movie, “Wish I Was Here.” Nowadays, the idea of crowdfunding has transcended this narrow definition, and it is being leveraged as a financial tool by niche service providers, real estate investors, philanthropic organizations, and more. It typically takes three forms: rewards based crowdfunding, equity based crowdfunding, and debt based crowdfunding.

Rewards Based Crowdfunding:

Rewards based crowdfunding is the most common type of crowdfunding campaign. In these cases, people are typically incentivized to help fund a project through the offer of some sort of reward. In the case of consumer products, the reward is often the product itself. For a more intangible product like a film, rewards can vary based on the level of funding provided; from something as minimal as a copy of the screenplay to something very significant, like production credit on the film.

Equity Based Crowdfunding:

Equity crowdfunding is a relatively selfexplanatory financial tool that allows companies to collect investments from a large group of people in return for shares of equity in the firm.

Debt Based Crowdfunding:

Debt based crowdfunding is a mechanism for borrowers to source loans from multiple providers. Much has been said about this form of lending over the past few years and its capacity to challenge the dominance of the traditional banking sector in the lending market. In fact, an increasing number of individuals and businesses are choosing to borrow money this way because borrowing rates are sometimes preferable to those offered by large banks. Online platforms like the “Lending Club” have greatly streamlined the borrowing and credit approval processes, significantly contributing to the increase in crowdfunded loans in recent years.

In summary, the increased prevalence of crowdfunding initiatives is evidence of the fact that we live in an exciting time where technology is allowing disruptors to impact traditional market spheres. In the years to come, it will be fascinating to see how crowdfunding evolves further as a financial tool and the steps that banks and large financial institutions will take to counteract this new competition.

Thank you, Nadesh, for sharing your opinions and thoughts with us. Nadesh is a strong believer in creating opportunities for new insurance graduates, and he along with his company Third Eye Solutions, are strong supporters of many of our insurance trade organizations. He may be contacted at 416-428-3699 or nadesh.shanmuganathan@ thirdeyesolutons.com

Well I certainly hope and trust that you and your family are having a safe and enjoyable summer season, and until next month, Ciao for now!