30. New rules for crowdfunding

With the chancellor’s announcement in the March 2014 budget that loan based crowdfunding investments can be included in ISAs, it’s clear that crowdfunding has well and truly become mainstream.

According to a 2013 study commissioned by The World Bank, the scale of the crowdfunding market worldwide is expected to be as high as $96bn; that’s almost twice as big as the current size of the global VC market today.

The crowdfunding sector has been open to criticism in light of its unregulated nature, and the apparent lack of protection afforded to investors; in the UK at least, that is about to change.

The ‘worst regulator in the world?’

Typically based online, crowdfunding platforms such as Crowdcube or Funding Circle are often seen as belonging to the tech, or even the social media sector.

The FCA’s paper “The FCA’s Regulatory Approach To Crowdfunding Over The Internet” positions crowdfunding firmly within the financial sector; and this is a good thing for investors, and the sector as a whole.

With such a wide range of investors supporting businesses seeking funds via these means, the expansion of the investment eligibility criteria that equity based crowdfunding platforms must adhere to should be welcomed.

‘Unsophisticated investors’ and investors not classed as high net worth can invest via these platforms, provided that no more than 10% of their investable assets are pledged.

This change hasn’t been received well by everyone, with one critic suggesting that this rule in particular will ‘take the crowd out of equity crowdfunding’. Another suggested that the FCA was perhaps the ‘worst regulator in the world’ for making this change.

This view has led to a feeling that the new rules will steer investors away from crowdfunding platforms, however in reality, those investing in this way are likely to be well versed in the risks, and the quality and quantity of investors should not be impacted heavily.

The ‘unsophisticated investor’ demographic is an interesting one, as the FCA will provide ‘self declaration questions’, in addition to requiring the platform to ensure that investors fully understand the risks associated with their investment.

Whether this will give rise to investors challenging crowdfunding platforms on the basis that they were not made fully aware of the implications remains to be seen, but it appears that the FCA are comfortable with the ‘self declaration’ approach.

Putting the crowd firmly into the financial sector

By positioning crowdfunding within the financial sector, the FCA are bringing the platforms into line with other financial services institutions, and will require the platforms to adhere many of the same rules.

Consumer credit licences will be mandatory. As will compliance with the Clients Assets Sourcebook, which sets out rules concerning the level of funds that must be held in reserve to provide recourse to investors in the event that a platform collapses.

This protection is important as crowdfunding platforms are not covered by the Financial Services Compensation Scheme, meaning investors have the risk of losing all of their investment if a crowdfunding platform fails.

As yet, the implications of these new rules on the businesses looking to raise funds via crowdfunding are still unclear. However, increased regulation typically brings with it more cost, and the fees payable to raise funds in this way may rise.

It is expected that many of these new requirements, along with additional reporting responsibilities, will be easily adopted by larger, established platforms. New entrants may find this more challenging, but overall, increased regulation within the sector, especially the increased protection for investors, should be seen as a positive step.

To find out more about investing, or raising funds via crowdfunding, or if you would like to discuss any of the topics covered above further with Tectona Partnership, please contact Mark Nicholls on 07818 407061.

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