FCA Publishes Review of Crowdfunding Regulations States; “No Need to Change”

Crowdfunding Word Cloud 2014As anticipated, the Financial Conduct Authority (FCA) has published a regulatory review of the crowdfunding environment – including investment crowdfunding and peer to peer lending. Rules were initially released in March of 2014 with the government entity taking a “light touch approach” that was broadly embraced by most industry participants.  In stark contrast to some other markets, including the United States, the FCA made a conscious decision to allow the nascent industry to grow and evolve without debilitating rules. The administrators early on recognized the vital importance of facilitating capital formation in markets that were effectively broken or inefficient. The FCA affirmed “they see no need to alter course” as things are pretty much working quite well. This publication provides a complete high level overview to the UK market with the expectation being that a more complete review will occur in 2016.

British Pounds Money £10The authors of the document state,

“We have seen the crowdfunding market continue to grow rapidly. We recognise that it is still early but, at present, we see no need to change our regulatory approach to crowdfunding, either to strengthen consumer protections or to relax the requirements that apply to firms.”

The tone of the document reflects the opinion that both sides of the equation are being adequately addressed.  Consumer protection has remained resilient while rapid growth of new forms of finance has occurred.

The document depends heavily on data collected by Cambridge University and Nesta – two widely respected sources of research.

For loan based crowdfunding the report highlights the rapid growth stating a total of £1.3 billion for 2014 or 3 times larger than the year prior.  Also of interest is that in 2014 for the first time business loans captured a higher percentage of the market than consumer lending.

In March of 2014 there were 50 firms operating in the P2P space.  Since that time the FCA states it has authorized  one firm and they are in the process of reviewing 8 others.

Financial Conduct Authority FCAFor investment based crowdfunding, once again reflecting on Nesta data, the FCA report states for 2014 £84 million was completed in funding a three times increase over 2013.  Equity based crowdfunding grew by 201% in 2014 with the average amount raised being £199,095.  Around 95% of funded deals were deemed eligible for the two tax subsidies – SEIS and EIS.  Average age of the investor was 40 years old with an average portfolio size of £5,414.  Interestingly most investors indicate their motivation was financial gain and not to finance a friend or family member.

FCA Commitment to Supporting Innovation Martin WheatleyFor investment based crowdfunding in April of 2014 there were 10 firms operating. Today there are 14.  The FCA is evaluating 10 other platforms presently with another 11 identified creating a total of market participants at 35.

The FCA is actively monitoring the space, and as has been previously reported, appears to be most concerned with promotional efforts by platforms attempting to boost business. The FCA “took action” when they deemed promotions did not meet their standards.  The FCA also expressed “concern” over the mini-bond space and the need for “balanced” promotion.

The FCA has established an active and ongoing communication process with all UK platforms.  They recognize these companies must be part of the conversation and regulations are NOT a one way path.

In closing the authors state;

“We will continue to monitor the market in addition to the formal review process and will take any appropriate action. If, for example, the risks to which investors on loan-based crowdfunding platforms are exposed increase to mirror those seen in investment-based crowdfunding platforms, we will consider applying a similar approach as for non-readily realisable securities. It may be that there are changes to the regulatory framework for crowdfunding as a result of future EU work.”

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  • Rob Murray Brown

    Did you know that Crowdcube employ a rewards system to get peopel to send them names of companies to sell equity on their site? Surely we have got somehting very wrong when the platform is activeely encouraging companies – ones they have no knowledge of and ones who might not need to raise capital – to sell equity to raise cash and thereby make Crowdcube money. You can get £250 for a referral. ‘Desperate’ comes to mind.

  • Rob Murray Brown

    Yet more good news for Crowdcube. Having persuaded 6500 people to fork out £2.3m on their site for Caterham, the ailing racing team are finally be wound up just 2 months later. What a farce.

  • Rob Murray Brown

    The real problem is Crowdcube. Their game show promotions and grossly misleading pitches have led many investors to commit money to what now appear to be very lost causes. When a company launches with Yr 1 projections of £860k and manages just £80k, you would expect that when they reappear on the site to raise more cash – obviously the first £350k had been burnt – that the FCA would expect the intial projections, still warm, to be part of this new pitch – by way of an honest and open and even transparent explanation.

    You would be very wrong. In fact the pitch talks about the success of the first year – the one that saw sales of £80k from two City based units! The list of misleading, exaggerated and sometimes downright dishonest information vetted by the site is large – I have more than 80 plans. How else would the pitches sell their equity, if they didnt give punters mouthwatering Facebook growth figures and the flashing dollar signs. Any unhelpful comments are removed – as is any criticism of the site. It is a very long way from transparent.

    Your headline here is an odd one – you are the only commentary on this FCA annnouncement to make it appear that all is ok – check out the FT headline ”FCA rebukes equity crowdfunding companies” and the WSJ ”UK regulator says UK Crowdfunding sites cherry-pick information”. Interesting eh.

    • crowdfundinsider

      @robmurraybrown:disqus The title references exactly what the FCA report stated. It was not the intent of the FCA to “rebuke” anyone. Perhaps it is the FT went too far in using a term that was neither explicit nor implied?
      JD

      • Rob Murray Brown

        I think we can agree that the FT and WSJ are serious papers with studious reporting which is well regarded on the whole. They both point to criticisms that you have washed over. This is no great surprise given all the other articles you have penned on the subject.

  • As the CEO and Co-Founder of SyndicateRoom, I am very pleased and honoured on behalf of our team to report that we have never received a single warning from the FCA.

    There are several good reasons for that:

    – we have never deleted a negative comment,

    – our investors have always invested in the same class of shares and same price per share as the other investors in the round, and

    – our members get pre-emption rights along with all other investors.

    As a result we have been attracting highly sophisticated investors that know the industry inside out.

    It’s important that the entire industry is not painted with the same brush because not all platforms are the same.

    Goncalo

    CEO and Co-Founder of SyndicateRoom

    • crowdfundinsider

      @SyndicateRoom:disqus Thank you for sharing your perspective. I think that transparency in the industry is imperative and the platforms that embrace transparency will rise to the top. The regulators have a line to walk in balancing investor protection and engendering an environment where funding platforms may grow unhindered. So far I think they have done a decent job of it. Still very early years though.
      JD

      • Scott E. McIntyre

        All good comments, but I feel there are two measures here: accredited investor portals vs “retail” investors. In the US we have seen BD/Title II portals grow, and when novice investors finally get their opportunity, many rightfully fear a glut of otherwise less-conventional/less-deserving offerings will get funds–that’s where systemic transparency is important. It seems that the SEC’s stance on “protecting” these novice investors has rendered them unable to publish any rules at all. Clearly not the intent of the JOBS Act. I think markets abroad, like in Australia, show that it can be managed. But as many know already, October will come soon enough…and hopefully some new legislation before that will clear a path to at least testing the waters. I happen to be from the camp that says communication and transparency in this field will suss out the scams as fast as I can sniff spam mail in my inbox just by the subject line. Time will tell.

        • crowdfundinsider

          @Scott Thanks for pointing out the differences between the two systems. I do believe the US can learn from the evolution of the UK market and at times a wonder if the British data is not given the credence it deserves.
          JD