Insurance expert issues alt-fi liability warning

Minkel Portrait

Monica Minkel is a Senior Vice President and Executive Protection Practice leader at Poms and Associates Insurance Brokers

An experienced insurance provider to the crowdfunding industry cautions both platforms and issuing companies to look carefully at their insurance coverage before unveiling their capital raise or site.

Monica Minkel is a Senior Vice President and Executive Protection Practice leader at Poms and Associates Insurance Brokers. She writes custom insurance policies for crowdfunding clients across the country.

While specific industries each have their own unique liability areas, Ms. Minkel said lack of professional liability coverage, for one, leaves a company exposed to litigation for something as simple as an omission or incorrectly typed phrase. It also means you are not preparing for the inevitable.

“Sooner or later there is going to be a loss of some type.”

Ms. Minkel has seen increased interest in crowdfunding coinciding with the announcement of Regulation A+. While there is interest across both industry sectors and capital raise types, one thing they all have in common is the introduction of new investors.

Poms-Logo-Alternate2-4Color-PantoneconvertedAnd those investors come with expectations, Ms. Minkel said. When a company is undertaking a raise, they publish information explaining the benefits to potential investors. And in spite of their best efforts, many companies fail to deliver on those promises.

“When success is not achieved, investors can claim they were mislead,” she explained. “The loss of money can result in a shareholder suit.”

The chances of such action increase along with the number of investors, especially if they are not experienced ones, Ms. Minkel said. This is a main reason why companies considering a Regulation A+ offering need to have such coverage.

“As the number of investors increases so do the number of people that can find fault with a company’s decision making process,” she explained.

To protect against such an event, most public companies buy some sort of liability insurance. It covers them in the case of shareholder class action, director or officer liability, and corporate malpractice.

Crowdfunding portals also have to obtain the proper insurance, Ms. Minkel said. Regardless of their format, they serve as a meeting place for investors and companies seeking capital.

“They have professional liability exposure for the quality of information placed on their platform,” she said.

During our conversation I likened the approach some platforms take to that of a dating site, where they provide a forum for people to meet but claim no responsibility if things go wrong.

“Look at some of the recent litigation against dating sites,” Ms. Minkel suggested. “Any mechanism you create that allows information to be shared between parties creates the potential for liability if a customer deems that information to be credible.”

“The eventual question becomes who is ultimately responsible for the quality of data on a site?”

Any such site has a responsibility to perform reasonable due diligence to ensure the quality of information they post is accurate.

The marketplace-lending phenomenon is so new platforms business plans and underwriting algorithms have yet to be tested by a down part of a cycle, Ms. Minkel said.

“Running a company is hard and you are not always going to be successful,” she said. “Sometimes the timing is bad, other times it’s the leadership or the product.”

“If you own your company and you lose your own money it is bad enough, but your responsibility is much greater when other people’s money is involved.”

When that down cycle comes, failures will be inevitable, including with some of the larger players, Ms. Minkel suggests. One sector she expects to see challenges is real estate crowdfunding.

“I expect to see real estate platforms face these challenges first because real estate itself is so cyclical,” Ms. Minkel said. “I live in Denver and in the last five or six years the market has completely reversed. Houses are worth more now than they were before.”

While there are few sure bets with investing, one that comes closer than any is the dollar riding on the belief not every one of the estimated 110 real estate crowdfunding platforms will survive a down period, she added.

“When the downturn comes and people do not get their promised 10 or 12 percent return, some investors will get disgruntled,” she predicted.

Simply putting “caveat emptor” on your page has some value but does not give you absolute protection, she said.

The number of niche verticals is growing, whether it be student loans, elective surgeries, or microbreweries. While some sectors have common needs and others are different, one factor Ms. Minkel said is crucial is a solid business plan.

One interesting area to watch is what happens if and when federal law is passed, especially if it contradicts state exemptions.

“There are many concerns with state exemptions,” Ms. Minkel said. “It is always easier to manage one set of rules for everybody.”

Like everyone involved with alternative finance, Monica Minkel is excited to see how the industry develops over the next few years.

“As we work through the next cycle of legislation and regulatory changes and as these platforms evolve, some will survive and some will consolidate. It will be fascinating to see who comes through.”

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