RISKS vs. MITIGATION MEASURES: Crowdfunding (shares/equity)

Project Developers’ Perspective

RISKS

• Shares/equity require relinquishing a part of the ownership.
• The return is not limited to an interest rate, but grows with the profit of the project.
• Before drilling, it is difficult to judge what the project and thus the shares/equity are worth and to find a balance between the amount of crowd investors’ interest and the equity level.
• A large duty of care is needed, because equity investors often want to be integrated into the decision making process.
• The involvement of many different small investors implies a governance risk. General assembly rules need to be followed.
• The amount of reporting requested for equity models is high.
• Having to give a say to equity investors can be staff- and time consuming. Co-ownership of a few hundred individuals as opposed to a small number of large investors bears the risk of tedious decision making processes.
• In crowdfunding equity, a project developer’s commitment towards the shareholders needs to last from the beginning of the funding until the end of the project (inability to exit investments). Equity can only be bought back if the investors are willing to give it back.
• The uncertain outcome of a geothermal project can lead to a conflict of interest between the project developer, the crowdfunding platform and the community investors.
• If the results of the project are below expectations, it might be difficult to find investors for possible future projects.
• Illicit activities of the platforms like financial fraud need to be considered.
• Legal requirements for crowdfunding equity are more complicated than for crowdfunding loans.

MITIGATION MEASURES

• The presence and conditions of insurance that protect from financial losses should be investigated.
• Project developers should think in advance about the financial structure and shareholder involvement (i.e. to which degree and in which format shareholders are involved in the decision making).
• A nominee structure instead of a direct shareholding structure can add benefit to project developers in that they only deal with one shareholder.
• A low to moderate crowdfunding proportion (e.g. maximum of 10-15%) of the overall project financing plan can reduce the governance risk.
• Tools that can increase the confidence and credibility of a crowdfunded geothermal project towards all stakeholders are considered an important mitigation measure in crowdfunding equity. Possible examples are official sustainability certifications/ concepts/labels, institutional match funding, patronage of well-known persons from the renewable energy community, and the involvement of geothermal experts.
• To increase local support, a sense of local project ownership could e.g. be achieved by offering local community shareholding/equity for free or for a low price to inhabitants of a certain radius around the project site.

Community Investors’ Perspective

RISKS

• Crowdfunding equity investors basically face the same risks as project developers (e.g. exploration risk, offtake risk, currency risks, dependence on feed-in tariffs, tax changes, etc.)
• In most cases, shares of an equity crowdfunding campaign are difficult to trade due to the lack of a secondary market (inability to exit the investment). Community investors have to wait for a formal exit to retrieve investment and profit.
• If the project fails (e.g. due to a dry well), there is a risk that no reward will be realized.
• The return from a geothermal project can only be expected after a minimum of 5-7 years.
• The dilution of investment is another aspect that needs to be considered. The project developer might seek multiple crowdfunding rounds (serial crowdfunding), which impacts the proportion of shares in total and poses a return risk to the community investor.
• There have been negative examples of financial fraud associated with crowdfunding equity in the past.
• In the case of a co-operative model, low credibility vis-à-vis banks, regulatory bodies, or partners can be a hurdle.

MITIGATION MEASURES

• Good information policy and transparency of financial aspects need to be sought so that the community is well informed about the risks and possible rewards.
• It is recommended to choose the crowdfunding platform carefully before investing.
• Look for a governmental or institutional guarantee, a trust fund, risk mitigation scheme or insurance product. This can be especially important during the high-risk phases of a geothermal project.
• An example of an insurance product earmarked for equity crowdfunding platforms is the global insurance organization AIG’s Crowdfunding Fidelity coverage. This policy covers the potential theft of assets that can cause business failure and financial loss to investors.
• Shareholder rights in the form of potential voting rights can be a risk mitigation measure because of a certain degree of participation in the decision making progress and the involvement in important processes.
• In the case of a co-operative model, tools that can increase the confidence and credibility of a crowdfunded geothermal project can be applied like specified for the project developers’ perspective.