Lending market opens up to private investor

Andrew Lindsay, head of corporate finance at law firm Lupton Fawcett Lee & Priestley, said that the Financial Service Authority’s (FSA) stance that websites which allow firms to raise finance from consumers should not be promoted to amateur investors seemed like “a haughty attitude”.

Speaking at a business breakfast organised by the West Yorkshire branch of the Institute of Directors, Mr Lindsay said: “In a sense, the kind of privileged club of institutional investors and those who are at the front of the bus when there are IPOs are not being nudged out, but entry of the private investor is being allowed into the investing and lending through the crowdfunding platforms, so there’s a sort of democratisation going on.”

The Financial Services Act and the creation of the FSA pre-date crowdfunding and this has created “a regulatory dilemma”, said Mr Lindsay. Current UK legislation is not fit for purpose, he suggested.

“It’s a little bit of square peg in a round hole. The regulations were not designed, or invented, with crowdfunding in mind so we’re having to fit those businesses and business models into the existing regulations.”

At the event, held at Lupton Fawcett Lee & Priestley in Leeds, Mr Lindsay said there needs to be “a clearer solution”.

The FSA says most crowdfunding should be targeted at sophisticated investors who know how to value a start-up business, understand the risks involved and that investors could lose all of their money.

But Mr Lindsay questioned why crowdfunding should be “the preserve of high net worth individuals or sophisticated investors”?

He added later: “There are a lot of people who start with nothing and make something out of nothing and do extremely well, why should they be precluded from making a choice that they regard as informed?”

Crowdfunding, usually an internet-based means of raising money from the mass market for a project or business, can take various forms, including debt, equity, donations or rewards – the latter sees investors receive an item or services in return for their funds.

Equity-based crowdfunding has seen the greatest compound aggregate growth since 2007, but rewards-based crowdfunding still holds the lion’s share of the crowd funding market, the audience was told.

Prefacing the statistic by saying that it is difficult to validate the size of the crowdfunding market, Mr Lindsay said it is thought it was worth $2bn worldwide in 2012, with forecasts suggesting it will grow significantly in the coming years.

Business Secretary Vince Cable has previously said that he wants to see as much competition in the market as possible and for businesses to have access to a wide range of finance sources.

The Government recently gave a boost to the non-bank lending sector with £55m in public funding to help ease the flow of credit to small businesses.

Dr Cable pledged the money to online peer-to-peer lenders like Funding Circle and Zopa and other finance suppliers.

He said match funding from the private sector will make at least £110m available to small businesses over the coming years.

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