New Rules for Crowdfunding

In information released by the Crowd Funding Centre of The Social Foundation, during the first couple of months of 2014, £2.4 million has been raised through crowd funding in the UK. The number of equity and rewards projects that have been launched has topped 2,600, and more than £1,700 an hour is being raised.

But the Financial Conduct Authority (FCA) is concerned that many investors may not understand the risks involved in investing in a start-up business. While many new businesses have only been able to get going with funds from crowd funding, statistics prove that between 50% and 70% of start-ups fail in their early years.

Addressing the Risk

The FCA has therefore set up new regulations to come into force in April that try to address this. Chris Woolard, its Director of Policy, Risk and Research, said in a BBC radio programme, ‘We’re trying to strike a balance between on one hand making sure consumers are properly informed and have real clarity about the investments they are getting into, but on the other hand, making sure this … source of funding is open to businesses and individuals.”

One of the most controversial new rules is that investors must certify that a crowd funding investment will only be 10% of their investment portfolio. This has provoked the comment that ‘it takes the crowd out of crowd funding’ from Barry James, founder of The Crowdfunding Centre. It will be interesting to see how this will affect the fund raising efforts of businesses like Sian’s Plan, which recently started a crowd funding campaign that invites investments as small as £10 from people who don’t normally have investment portfolios.

Another Point of View

However, Ayan Mitra, CEO of CrowdBnk, interprets this rule as for experienced investors only and said, ‘We are pleased to see that the FCA has kept the ‘crowd’ in crowdfunding, by allowing anyone to invest up to 10 per cent of their available assets. This ensures crowdfunding remains available to all types of investor and, on the whole, we think the approach strikes the right balance between consumer protection and access to investment opportunities’.

So perhaps it is still worth going the crowdfunding route to raise start-up or business development funds at a time when many of the traditional routes are still virtually closed to SMEs. It could be a good idea to discuss it with your bookkeepers who may have experienced the results of this kind of fund raising with other clients.

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