The UK Financial Conduct Authority has sent a “Dear CEO” letter to the management of the UK investment crowdfunding platforms. Signed by Debbie Gupta, Director of Consumer Investments Supervision, the missive cautions platforms on ensuring that investors fully understand the nature of the risk affiliated with these speculative investments.
The FCA is currently in the process of reviewing the promotion of high risk investments which may include investment crowdfunding offerings.
“…we are concerned that despite our existing marketing restrictions, too many consumers are still investing in inappropriate high-risk investments which do not meet their needs.”
The regulator is also concerned that consumers may be holding “more than 10% of their investment portfolio” in these risky ventures.
The FCA expects that platforms will make certain that investors understand the intrinsic risk before they invest while clarifying the amount of due diligence completed in advance of a listed offering. The regulator also requests that platforms “take reasonable steps to reduce the risk that investors hold more than 10% of their portfolio in this type of high risk and speculative investment as this is not likely to be in their best interests.”
Additionally, the FCA says it is concerned that IBCFs [investment-based crowdfunding firms] are predominately loss making, there is a risk that firms fail in a disorderly way…”
The UK is home to the most robust investment crowdfunding sector in the world with many successful firms leveraging the technology to raise growth capital. Yet the long runway needed for most investments to generate an exit makes evaluating the merits of these assets on a portfolio basis difficult in the near term. While all investments maintain a certain level of risk, early-stage ventures tend to hold a higher degree of risk with the anticipation of future outsized returns. In recent years, the FCA has become more cautious about these risks for smaller investors as many early-stage firms will inevitably fail.
A consultation on strengthening financial promotion rules on high-risk investments recently closed with results expected later in the year.