Written by Rebecca Ferguson
Crowdfunding is the buzz-word for raising money from the public for business, artistic or charitable ventures. The websites allow those seeking finance to publish details of their projects including how much cash they need and how they will use it. In some cases investors can subscribe as little as £10 in the venture. Some, like Just Giving, are very familiar. Others where companies or their advisers seek to raise funds by issuing shares (investment-based crowdfunding) and borrowing (loan-based crowdfunding) may not be. For high net worth investors, crowdfunding is appealing because it offers an opportunity to invest at a relatively low level in a wide range of business activities. There are also attractive tax reliefs available for equity investments through the Enterprise Investment and Seed Enterprise Investment Schemes.
Increasingly crowdfunding is seen as a viable alternative to bank finance and/or the more traditional corporate finance raising activities. But is crowdfunding as accessible as it sounds?
There are five types of crowdfunding:
Donation-based: where people donate to charities with no expectation of any return.
Prepayment or rewards based: where people give money to receive an award, service or product in the future, such as by buying a computer game or album in advance of its publication date.
Exempt: where people invest through organisations which are already exempt and therefore without the need for further regulatory controls or guidance.
Loan-based: where people lend to individuals and companies with the expectation of receiving interest and a return of capital.
Investment-based: where people invest directly or indirectly by buying shares or debt securities or units in unregulated collective investment schemes.
Until 1 April this year, only investment-based crowdfunding was a regulated activity under the UK’s Financial Conduct Authority (FCA) by virtue of the Financial Services and Markets Act 2000 (FSMA), in particular:
- S19 which makes it an offence to carry on a regulated activity by way of a business in the UK without being authorised by the FCA;
- S21 which prevents the issue of an invitation to engage in investment activity unless it is issued by or approved by an authorised person; and
- Part IV which sets out a detailed regime with respect to offers of securities to the public which can require (amongst other things) the issue of a prospectus or information memorandum inviting a subscription for shares.
There are some exemptions from the requirements to comply with the prospectus regime.
In order to avoid breaching FSMA, UK investment-based crowdfunding platforms have always had to be authorised directly or indirectly by the FCA.
Due to the increase in crowdfunding platforms, the European Commission issued a consultation paper last autumn to explore whether further action should be taken to promote and/or regulate crowdfunding in Europe. At the same time the FCA issued its own consultation paper on its approach to crowdfunding and other investment activities.
Following the release of the FCA’s October 2013 consultation paper, the rules about crowdfunding in the UK have changed with effect from 1 April 2014. As a consequence:
– Loan-based crowdfunding is now a regulated activity. Loan-based crowdfunding platforms must now also be FCA authorised.
– Unlisted shares or debt securities may now only be offered on websites to the following investor categories:
– institutional and professional investors;
– retail clients who:
- are certified or self-certified investors;
- are self-certified as high net worth investors;
- confirm they will receive regulated investment advice or management services from an FCA-authorised person or;
- certify that they will not invest more than 10% of their net investible portfolio in unlisted shares or unlisted debt securities, coupled with an appropriateness test administered by providers in some circumstances.
So is crowdfunding as accessible as it sounds? In terms of visibility and in enabling investors to invest at a level which suits their individual net worth, it seems the answer must be yes. However, for the businesses seeking the finance and for the hosts of the web-based platforms, investment-based and loan-based crowdfunding is a highly regulated activity in the UK and must comply with the requirements that the regulator imposes. The advantage of this should be an increase in consumer confidence and an upsurge in investment activity. Only time will tell whether this is what happens in practice although it seems that web-based corporate finance is in keeping with the times and is here to stay.
If you are seeking to raise funds for your business and wish to consider crowdfunding as an option, our corporate team is very experienced in this field and would be delighted to hear from you.
Contact the Author
I read law at the University of Manchester and subsequently qualified as a solicitor with Clifford Chance in 1989. I was a corporate lawyer at Herbert Smith before joining Davenport Lyons as a partner in 1999. I love the intellectual challenge of the law and the way that the law can be used to solve problems. I am a corporate M&A lawyer by background and practice, but I also have extensive experience in AIM, the London Stock Exchange and in shareholder disputes. Outside of work, my time is spent mainly with my family, socialising with friends and trying to keep fit by walking the dog and running as far and as fast as possible around Weybridge, where I live.