Oil And Water: Crowdfunding Regulation

UPDATE: Today (6/3/14) the FCA have released their paper outlining their approach to crowdfunding over the internet. The full paper can be seen here.

The FCA paper quickly outlines five different types of crowdfunding, and dismiss three of them from their remit. This includes donations or pre-payments to projects (such as this one, which I shamelessly add to this article because it is such an amazingly worthwhile project). This is good news, I’ve backed a number of projects, and felt the delight when the cd or book comes through and you realise you have helped someone realise their dream.

Instead, the FCA are staring hard at loan based and investment based (unquoted equity) crowdfunding.  They propose putting in place some rules to avoid abuse, such as asking non-professional clients to confirm they are not investing more than 10% of their net investible assets into such projects. In this way they seek to offer protection to the unwary. Check the paper for detail, but this seems prudent, and early signs are the FCA are adopting the (relatively) light touch this sector needs.

ORIGINAL POST:

The surge in popularity for Crowdfunding represents a very interesting challenge for the financial advice sector. It is, after all, an investment. It is currently unregulated, but the FCA or looking into this.

I’d like to sum up how I see things as they stand. Please note – I write from the perspective of a financial adviser. I am NOT pretending to be a crowdfunding expert (although I have run this run this blog past someone who is) and these comments are for other advisers so I’m assuming you have an understanding of the basics.

  • Crowdfunding exists at least in part because banks aren’t lending
  • Crowdfunding provides an opportunity for small amounts to be invested in projects, many of which are creative (e.g. books) or ideas (e.g. inventions)
  • Many of the people making crowdfunding investments are helping to support something they are interested in (as opposed to looking to make a profit)
  • Through crowdfunding you could lose all your money and you should only invest accordingly. The blogs/forums I’ve seen suggest this is generally understood
  • Crowdfunding for businesses – and therefore financial gain on the investment – is starting to be more heavily promoted
  • A logical next stage would be to market such projects and offer a simple vehicle – a collective investment scheme – through which people can invest
  • Anyone investing in an collective investment which was recommended to them by a regulated financial adviser has legal protection if the investment was inappropriate (e.g. Arch Cru), depending on exact circumstances
  • Anyone investing directly into an investment which turns sour may have redress through the Financial Services Compensation Scheme
  • Anyone investing via crowdfunding has no legal redress

So, what does this tell us? Well, it seems to me inevitable that the risks involved would lead to the Government wanting to see crowdfunding regulated in some way. And yet regulation is surely the last thing the crowdfunding world wants. That could destroy everything that is beautiful about an individual having direct access to an idea, and the creator having direct access to the public.

Yet if the path leads to middle men moving into this territory, putting together packaged products and providing a pathway to investment, then compliance and regulation will logically follow. As soon as a middle man appears in the chain, there is the potential for misselling, which leads to tighter regulation.

Compliance and regulation is not all bad news, it gives the punter some protection and ensures that all the suitable risk warnings are given. But that’s really not what crowdfunding is all about.

We have seen this before. A few years ago Film Partnership schemes evolved, and were sold by many financial advisers. They had attractive tax breaks. It seemed that most of the prospectuses referred to The Full Monty at some point. Some probably made money, but many many more failed completely. Some advisers made a lot of commission from these schemes.

It doesn’t have to be this way. I’m an adviser, I believe in financial planning advice. I believe financial reward comes from a combination of a good idea, hard work, and luck. But if someone wants to take a punt on something risky, that’s their right, it’s not up to me – or a regulator – to stop them. But I will make sure they are fully informed and aware of the risks as they go.

So in conclusion I would truly hate to see crowdfunding regulated in the same way that I am. It would destroy everything that is good about that exciting new world. But regulation with a light touch can be beneficial, can ensure the appropriate warnings are given, and can make sure that crowdfunding becomes part of the mainstream.

Chris Budd has published his first novel, A Bridge Of Straw – more info here

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