Crowdfunding : The next frontier in yield investing.

Thanks to the fact that Moolahsense makes all bids to lend money transparent, some readers should be aware that I started participating in peer-to-peer lending. In fact, for folks who have been following, I was able to lend $1,000 of my own money successfully to Leap Networks at about 8-9% interest rate about a week ago.

The decision to start investing in crowdfunding platform was not a financial one. There are higher yielding investments in the local stock-market like shipping trusts.

Getting into crowdfunding was an academic decision. I was doing a subject called Legal Issues in E-Commerce and wanted to write something which was cutting edge and novel so I chose crowdfunding as my research topic. Doing the research paper forced me to look at legal reforms in the US ( Obama JOBS Act 2012 ) as well as different equity crowdfunding models in the UK ( Crowdcube vs Seedrs ).  An interesting benefit from all this research was that I was able to befriend two lawyers who are familiar with the subject matter so I will trying my luck at getting an internship and perhaps even a training contract with these law firms.

After finding out that fraud is relatively rare in the world of crowdfunding, I decided to punt $1,000 of my own capital into Moolahsense so that I can eat my cooking instead of being an ivory tower academic. So far so good, the interest rate I offered was below the finalised interest rate of the loan.

My personal opinion about crowdfunding is that it will be the next big thing in finance. I think businesses and people in general will find ways to help each other online and cut off the banking middlemen to save business costs. This potentially creates multiple markets which are risker than our stock market institutions but can potentially be more rewarding.

Here is some advise for readers keen to get into crowdfunding :

a) Keep it within 5% of your total net worth.

MAS is still in the process of finalizing how to regulate crowdfunding platforms, so it's a wild wild west out there. You should limit your exposure to 5% of your total portfolio. No one really knows what happens if a borrower defaults even though the platform has a set of steps which they can take to help you recover part of your money.

( In legal parlance, you may not have a recourse in contract against a crowdfunding platform. You may have a recourse in tort but you really don't want to go there. )

b) Bid the minimum amount so that you can diversify your crowdfunding assets.

If the lowest bid possible is $1,000, bid only $1,000. If you have $5,000 capital for crowdfunding, spread it over 5 loans to 5 different parties.

c) Go for companies with less than 5% of default probability.

The great thing about the Moolahsense platform is that they have information on probability of default. That is the chance that you will lose your pants. Bid only for companies with a default percentage below 5%.

d) Have a minimum yield that you would like that you cannot find elsewhere.

For me, I generally bid about 16% interest ( which is actually 8.88% ) after meeting the 3 criteria above. I can find decent investments in SGX for lower yields.

I cannot expect every reader to be the same as I do because I take fairly high risks in the stock-market so you may be willing to loan for 6% or 7%. But please don't offer 4% or less because CPF-SA can give you a better deal.

e) Avoid property crowdfunding.

This is the most controversial advice which may piss off some parties in Singapore.

Stick with peer to peer lending and avoid property crowdfunding for now. Based on my research, I'm not sure whether fractional property ownership will come under MAS regulation for equity crowdfunding in the future and the proposals all seem very much like land-banking to me. For the past 10 years, there has always been a a lot of advertisements on purchasing foreign property. As a natural skeptic, I always wanted to know why the locals in their own country would be uninterested in those homes.

Furthermore, I suspect that many vendors are jumping on the crowdfunding bandwagon by abusing this buzzword when the original aim of crowdfunding was to help businesses raise capital because banks were underserving them.

Finally, REITs have always been the official means to crowd-fund property and all of them pay a decent amount every year.

Anyway, just take note that I got into crowdfunding because I benefit from writing legal research papers which my lecturers find novel and refreshing. It covers areas which still lack solid regulation in Singapore and other parts of the world. My risk of loss is really law and easily less than 0.1% of my portfolio so far.

In the future, if I ever write another book on Personal Finance, Bitcoins and Crowdfunding will definitely be part of it.