The crowdfunding sector has broadly welcomed FCA proposals for regulating the sector though there is some concern amongst platforms over a 10% cap for retail clients participating in investment-based ventures.
UKFCA chair Julia Groves says that. overall, the regulator’s proposals, put out for consultation this morning, “achieve a reasonable balance between consumer protection and access to finance and investment opportunities. They would also help ensure high standards consistently applied across the industry.”
She also notes that the proposals do allow ordinary people to invest up to 10% of their portfolio via crowdfunding, or more if they consult an independent financial advisor on those investments.
Groves (right) is also managing director of the Trillion Fund crowdfunding platform. Wearing this hat she says of the FCA’s proposals: "As a platform already operating within the FCA regime, this is largely ‘business as usual’ for Trillion Fund, we would be delighted to see high standards for consumer protection being consistently applied across the industry.
“Our only concern is that there is insufficient differentiation between loan and equity based crowdfunding – both now require an appropriateness test and the blanket 10% cap (unless advised) does not recognise that long term debt investments in operational solar farms, for example, may have a very different risk profile to an equity investment in a technology start up.”
The FCA suggests new rules for investment-based crowdfunding, which is already regulated. The consultation paper makes clear the regulator’s belief that these investments should only be promoted to those who understand the inherent risks or have the financial capacity to cope with any losses.
Grove says Trillion Fund plans to respond formally to the consultation to recommend that different limits should apply based on the risks of the business consumers are investing in, as well as the nature of the investment.
Richard Brockbank, co-founder of crowdfunding platform InvestingZone, an appointed representative of FCA-regulated venture capital fund manager E-Synergy, meanwhile says: “We have expended considerable effort in making sure that the risks inherent in early stage investments are clearly presented on the platform and that only investors who understand those risks are admitted.
Brockbank says he would welcome FCA regulation to standardise the way this is done across other platforms and to help give investors confidence in this newly accessible asset class. But he adds: “ We do not agree that participation in equity crowdfunding, and the fantastic tax breaks that go with it, should be limited to high net worth or sophisticated investors.”
“A concern is the number of companies entering what is essentially a professional financial sector without sufficient experience and others sites have very lax investor registration processes. Whist we encourage investors to carry out a certain level of due diligence, it is still the responsibility of the platform investment executives to ensure that all listings are sensible and only investors who understand the risks are admitted.
“With regards to limiting the amount that can be invested, we feel that this could be patronising to investors who can demonstrate that they know what they're doing but just don't happen to be rich.”
Meanwhile Jason Kluver, chief executive and co-founder of The Ideas Factory platform says: “Regulating crowdfunding can only be a good thing – for start-ups, investors and the crowdfunding companies themselves. The relationship between entrepreneurs and investors is built on trust, so anything the FCA can introduce to help increase that process will help everyone.
“We completely understand that complying with regulation takes hard work (we’ve done it ourselves), but it will also help discourage the less committed crowdfunding sites and should, ultimately, help investors make better decisions.”
You might also like to read http://www.ifamagazine.co.uk/wp-content/uploads/2013/07/IFA-Mag-Crowd-Funding-2nd.pdf