Watchdog to reign in crowdfunding sector

Revolution Software's games
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THE fast-growing crowdfunding sector will be subject to tighter regulation to provide more transparency and protection for investors, the financial watchdog announced this week.

Crowdfunding can allow individuals and small businesses to raise money from people willing to put money into projects and businesses. Projects can be as varied as computer games – York-based Revolution Software successfully raised the money to produce its latest game through online platform Kickstarter – to more traditional peer-to-peer lending schemes or securities such as unlisted shares.

Sometimes the investor’s only incentive is to see an idea they find attractive realised, such as a play, film project or public artwork, or to receive a special edition of the finished product. Others expect a return like a traditional investor.

Such fund-raising is often hosted online on platforms such as Crowdcube, Funding Circle, or Kickstarter.

Unlike more traditional private equity funds catering to wealthy individuals or institutions, ordinary people can gain exposure to growing companies by lending as little as £10, often without the fees accompanying equity funds.

The Financial Conduct Authority (FCA) said its rules would provide greater transparency in loan-based crowdfunding – companies seeking funds would have to provide “fair, clear information” to allow investors to assess risk.

Firms running loan-based platforms would also be required to have provisions for loan repayments to continue, even if the platform itself falls into difficulty.

The regulations prevent investors who do not receive financial advice or have a financial background committing more than 10 percent of their investment portfolio to securities crowdfunding.

Sophisticated investors such as wealthy individuals with investment experience and private equity funds will be allowed a greater amount, the FCA said.

At present, there are no rules in place for loan-based crowdfunding, while there are some FCA guidelines for securities.

The crowdfunding sector is growing fast. British investors provided £480m in loans and bought £28m in unlisted securities in 2013, up 150 per cent on 2012.

This week US crowdfunder Kickstarter said it had now raised $1bn for projects since it began in 2009, with more than half of that being pledged in the last 12 months. But despite its soaring profile, some have voiced concerns over investor protection in the sector.

The FCA launched a consultation last year, and the new rules will come into force from April.

“One of the biggest challenges we’ve come across is people saying, ‘Oh, you’re unregulated’, and that raises questions,” said James Meekings, co-founder of Funding Circle, a loan-based platform hosting £20m a month in lending.

The FCA will introduce tougher capital requirements further down the line, since such investments are not protected under the Financial Services Compensation Scheme. Platforms are already required to have a minimum capital base of £20,000.

“We want to ensure that consumers are appropriately protected but not prevented from investing,” said Christopher Woolard, director of policy, risk and research at the FCA.

“We have been careful to listen to feedback from the market and the rules provide consumer protection, while allowing businesses to continue to have access to this innovative method of funding.”

There was criticism of the new rules, in particular the insistence that investors must certify that they will not invest more than 10 per cent of their net investible assets in crowdfunding.

Barry James, founder of The Crowdfunding Centre, said the regulation locks out ordinary investors. “Make no mistake, the infamous 10 per cent rule – however it’s dressed up – does just that: it takes the crowd out of equity crowdfunding,” said Mr James.

Stephen Hazell-Smith, architect and co-founder of AIM and PLUS markets, said: “Last week the French regulator threw open the doors to its adult population to invest in equity crowdfunding as it pleases. This week our regulator has taken the crowd out of crowdfunding by putting in place rules on just who may be permitted to be an investor.

“How absurd to have the French beating us in a sector where we have the infrastructure in place to lead the world.”

The Crowdfunding Centre said more than £1,700 per hour is being raised via crowdfunding in the UK. Its said that since the beginning of 2014 more than 2,600 equity and rewards projects were launched – more than 45 per day.