Fears of Crowdfunding Crackdown in UK Appear Unwarranted

Big Ben at Night United Kingdom (Wikipedia)In several recent headlines in the UK press there have been statements that “Crowdfunders Face Crackdown”  as latent fear for investor protection creeps into regulatory discussions while equity crowdfunding quickly grows.  In one particular article a Partner at Kuber Ventures commented that;

“investors with little or no experience of how to value a small business are putting themselves at unnecessary risk by not talking to a professional fund manager”.

The United Kingdom has been a leader in the investment crowdfunding world with crowdfunding platforms having raised millions of pounds to date – without a touch of fraud in sight.   To gather more feedback on these recent rumblings we reached out to Julia Groves, Chair of the UK Crowdfunding Association;

The Financial Conduct Authority (FCA) announced some time ago that it would consult Julia Groves TrillionFund and UKCFAon the existing rules governing crowdfunding, alongside the creation of regulation for peer-to-peer lending. This is a positive development for the sector.

The UKCFA is working very closely with the FCA and HM Treasury, and we are having constructive conversations on creating a new framework which balances consumer protection with regulation that enables the crowdfunding industry to grow.

Crowdfunding can provide much needed competition into the financial services marketplace, both for businesses and projects seeking funding and consumers seeking alternative sources of investment return. We are hopeful that this can be achieved through proportionate FCA regulation.”

UKCFA Founding MembersIn many respects investment crowdfunding came about in the UK prior to formal regulation.  Peer-to-peer lending continues to be un-regulated to this day.  The FCA is  circling back to review this new form of lending.  What is known is the FCA has always intended to monitor and review how equity crowdfunding is evolving.  The FCA has a scheduled a release of consultation papers for both equity and debt crowdfunding later this fall.  The UKCFA has been very engaged and pro-active in providing a constructive dialogue which to create thoughtful yet unobtrusive regulations.

Equity crowdfunding sites such has Crowdcube and Seedrs have successfully raised funds for many smallFinancial Conduct Authority businesses.  Small companies are risky ventures but the UK government has seen fit to incentivize these types of investments with lucrative tax subsidies.  These have aided the growth of crowdfunding while creating new jobs and allowing an efficient allocation of capital to companies which otherwise may not have been able to find funding.

Opportunities to invest in start-ups used to be the realm of the elite.  The gatekeepers were the wealthy population of Angels and Venture Capitalists who now see their business model at risk with growing competition – as the barriers to entry are torn down.

Crowdfunding is the democratization of investing where the masses now have the same opportunity – as well as the risk – of those in the upper tax brackets.  As with any industry being challenged by competition, many will fight to maintain their lucrative past.  Some will embrace the change of disruptive innovation and adapt.   But in the end competition should reign and crowdfunding should flourish.

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  • andrea krizsak

    I think its also natural for the fund managers to want the business and try and charge hefty fees, why not, but I also think that for CF to succeed there need to be good and cheaper (financial, technical, legal) advisors available, and I am not suggesting that anyone should work for peanuts, but that the overheads are reduced.

  • andrea krizsak

    Well, the whole idea of crowd finance is partly that the cost is kept low, and smaller projects can be financed, so if fund managers etc are involved that would mean that a large percentage of the costs will be going towards these financial advisors, which does not really make sense. Say if you are planning a business that will cost £100.000, for example, you will not really want to spend on fund management fees which will be dispropportionately high, and secondly, the past couple of years also show that whatever they might advise might work or might not, but they will get a fee in any case, and OK maybe they also make more if the business works and does well, so they are incentivised.

    The upfront cost of having a fund manager is very high though, so I believe that advice in crowd finance needs to be cheaper and accessible to the “masses”, so the question is, how.

    One way of getting cheap advice is to use a “fund manager” who has lower overheads, so in other words, has the skill set etc, but does not have to earn big money to make ends meet, or to bring in a lot of money for a big corporate firm, in order to earn a living, so maybe smaller advisory firms are better and cheaper than the big ones. Many people leave the big firms and set up smaller advisory firms, so they will be just as experienced/knowledgeable.

    Another way of getting cheap advice is finding people one can trust so there is genuine goodwill on both parts, and that is the only way it will work on the longer run anyway, so worth taking the trouble.

    Technically, standardisation makes things cheaper as well, so standardised contracts can reduce legal fees, and at the same time, increase the number of people who can afford to pay it.

    Good legislation can also make things cheaper, as I am sure CF needs to be regulated properly. So the cost of entry has to be kept low. This is a gradual transition to cheaper finance and local businesses though, nothing dramatic.

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  • crowdfundinsider

    Barry,

    Thank you for the feedback and insight. Please forward your contact info to us at info@crowdfundinsider.com as we would like to hear more.

  • Barry James

    The FCA has been heavily criticised by Barry Sheerman, MP, who chairs the Westminster Crowdfunding Forum, and yesterday wrote to George Osborne the Chancellor of the Exchequer as well as the governor of the Bank of England and the UK Business Business secretary asking them to repudiate the FCA’s slur on the industry – as reported here:

    FCA faces stinging reprimand for crowdfunding FUD tactics
    http://realbusiness.co.uk/article/23098-fca-faces-stinging-reprimand-for-crowdfunding-fud-tactics

    I’m a little surprised that Julia has failed to mention the above. We at The Social Foundation have been Campaigning for a full year now and will continue to do so to ensure that the industry – indeed the whole Crowdfunding movement – is not hobbled by bad regulation or subject to such unwarranted attacks.

    Thanks you for your report. You’ll be unsurprised to hear that we agree wholeheartedly with your conclusion.

    Barry E James
    Director
    The Social Foundation