To those who assumed (not hoped) that crowdfunding was a fad which might blow up and go away … well, we’ve got some bad news.
For those still unsure about how Crowdfunding works and the different options available, a brief explanation ….
It is suggested that true ‘crowdfunding’ pre-dates the internet with projects like the ‘Statue of Liberty’ being achieved via funds raised from a large number of donors but the online alternative finance platforms are what we generally think of as crowdfunding, and they have been building momentum during the last 10-12 years.
Types of crowdfunding
Reward based crowdfunding is where people put in money because they want that product, service or experience. It’s not an investment and there is no expectation of any return.
Equity crowdfunding is where people invest in a relatively small amount of money into a business in order to get a return, either through dividend payment or an ultimate sale.
Debt-based crowdfunding is where people lend money to a business and this type of crowdfunding covers around 90% of the market. These businesses usually turn to crowdfunding because they have not been able to get access to bank finance. The individual lenders are equally frustrated by the level of bank returns and so turn to crowdfunding investment. The lenders get the protection of a regulated platform in which to invest with steady annual returns of 4%-6%.
The UK has the most open regulatory control framework for crowd funding in the world but some concerns have been raised about the lack of advice and regulation in this market, particularly when many investments are in very early stage start ups, with a notoriously high, but not always recognised, failure rate.
But regulation is arriving. Since October of this year, all forms of investment crowdfunding are now regulated by the Financial Conduct Authority. The new regulations have also created a category for restricted investors which say that you shouldn’t be putting more than 10% of your net investable assets into non-readily realisable securities.
It’s not about necessarily the risk of the entity here but the length of the term. It’s not going to be easy to get that money out and therefore it’s a fairly long term commitment. It’s also a common sense check so that potential investors understand that their capital is at risk and not covered by the Financial Services Compensation Scheme. Investors have to demonstrate that they understand that they may not get their money back before they can proceed.
Crowdfunding has fundamentally changed some of the options available to businesses and investors. The former can get access to funding quickly, cost effectively and from groups of investors who want to see them succeed, because their interests are aligned.
Regulation has started to arrive but, according to Julia Groves (UK Crowdfunding Association) “strikes a sensible balance between consumer protection and opportunity”.
Whatever the future holds, Crowdfunding is definitely here to stay and is providing many a growing business with rapid access to funds and built-in advocates.