American International Group is giving crowdfunding a try. Not to raise money for startups, but to profit off investors’ concerns about being ripped off as they invest in small businesses through this new type of funding.
The New York company is set to launch what it is calling “Crowdfunding Fidelity,” an insurance product developed to protect investors on equity crowdfunding platforms against fraud.
In announcing the new coverage Tuesday morning, AIG noted that there have been few instances of fraud in the sector so far. But it said its new product would help to build investor trust to ensure underlying issuer trustworthiness.
“As a sector still in its infancy, equity crowdfunding platforms are only as strong as the confidence they instill in their investors,” said Lex Baugh, AIG’s president of liability and financial lines, in a news release.
The coverage isn’t available to protect against just any crowdfunding project. So-called equity crowdfunding offers investors stakes in a company. Earlier this month, new U.S. rules kicked in under which ordinary investors—not just wealthy individuals, or so-called accredited investors—can participate in such offerings. The fundraising option originates from the 2012 Jumpstart Our Business Startups Act, or JOBS Act.
AIG will sell the coverage only to those portals it has determined have adequate processes in place to check out backgrounds of the businesses they allow to sell equity stakes, Mr. Baugh said.
AIG’s first policyholder is Eureeca, an equity crowdfunding platform registered in the U.K. and based in Dubai. In the AIG release, Eureeca said it launched in 2013 and focuses on providing deals from the Middle East, Europe and Southeast Asia.
AIG said equity crowdfunding platforms like Eureeca that buy its coverage are likely to make the protection available to all investors that use the portal. The platforms may publicize the existence of the AIG coverage to make investors more comfortable about using their platforms to start with, Mr. Baugh said.
Platforms like Eureeca would pay the insurance premium out of money raised from investors, according to AIG.
Some aspects of the coverage will vary by country. As of Tuesday, the coverage is available to platforms in the U.K. and Canada, and as other countries finalize regulations for companies to raise capital, AIG intends to customize its offering.