Investment crowdfunding allows investment in real estate and businesses with small amounts of money. However, due to the financial product’s characteristic of having “no guarantee of principal” and its “low liquidity,” specific failure risks exist.
1. Low Asset Liquidity and Capital Immobilization
Since there is no market where investments can be bought and sold at any time like stocks or FX, capital is tied up for long periods once invested.
- Inability to Cancel Mid-Term (Generally):
- Most projects have a set operation period (several months to several years), and funds cannot be withdrawn even if needed during this period (liquidity risk).
- If unexpected financial needs arise, such as a sudden expense, the invested capital is not available, potentially worsening cash flow.
- Prolongation of Investment Period (Delayed Redemption):
- If the borrower’s business deteriorates or real estate development is delayed, the repayment (redemption) of the principal may be late.
- A redemption delay locks up the funds for an even longer duration, significantly disrupting the subsequent asset management plan.
2. Lack of Understanding of Risk and Return (Principal Loss Risk)
In many cases, investors are blinded by “high yields” and fail to accurately assess the underlying risks.
- Underestimation of No Principal Guarantee:
- The investment principal is not guaranteed. There is a risk that part or all of the invested funds will not be returned (principal loss) if the borrower defaults or the business fails.
- Particularly high-yield projects often indicate low creditworthiness of the borrower or a higher business risk.
- Lack of Diversification:
- Concentrating funds in a specific platform or project instead of spreading them across multiple opportunities.
- This significantly increases the risk of suffering a massive loss all at once if that platform or business fails.
3. Error in Platform and Operator Selection
Investors must rely on the platform (operating company), making operator selection the most critical risk management factor.
- Insufficient Investigation of Operating Company’s Credibility:
- Investing based on a platform’s marketing or visibility without thoroughly checking the operating company’s management foundation, past performance, and financial status.
- Investing with operators who have a history of large-scale problems or delays carries a high risk.
- Lack of Understanding of the Scheme:
- Investing casually with an assumption of safety without understanding the collateral or preservation measures (e.g., Senior/Subordinated structure) for each project.
- Projects with low subordinated investment (investment by the professional operator) or weak collateral expose investors to a higher risk of principal loss if losses occur.
💡 Typical Failure Pattern
“Drawn by the high yield, I concentrated almost all my funds into a specific real estate crowdfunding project. However, the development was halted long-term due to the pandemic, and redemption was delayed by over six months. The funds I suddenly needed could not be withdrawn, putting pressure on my living expenses.”
| Failure Factor | Specific Risk and Outcome |
| Lack of Diversification | Concentrating all funds in a single project exposed the entire asset base to risk when that project encountered trouble. |
| Underestimation of Liquidity | Mistakenly assuming the invested funds were “easily accessible” resulted in the practical damage of strained living expenses when the redemption delay occurred. |
| Misjudgment of Risk-Return | Focusing only on the high yield return without adequately evaluating the underlying risks of “business interruption” and “redemption delay.” |
Key to Success: To avoid failure in investment crowdfunding, it is crucial to adhere strictly to the principle of “investing only surplus funds,” diversify investments across multiple operators, and prioritize the “credibility of the operator and the project” over high yields.
