Most of us have now heard of crowdfunding as a way for businesses to raise funds. Due to online portals (known as crowdfunding platforms) providing an accessible route to funding, fundraising campaigns which often additionally make use of social media, and some notable successes, the profile of crowdfunding is high.
For the uninitiated, crowdfunding can take a number of forms, including loans (such lending is often called peer-to-peer lending), invoice trading, investment-based funding (such as debt and equity securities) and reward-based or donation-based funding, but the common denominator is funds being invested in a business mainly by individuals but also by institutions, which are known as the crowd.
The UK now has an established market for crowdfunding. Figures published in November 2014 calculated that loans made on loan-based crowdfunding platforms in 2014 amounted to almost £1.3bn and that the amount raised in 2014 on investment-based crowdfunding platforms was expected to be £84m, with the growth in both forms of crowdfunding at around three times the levels seen in 2013.
The Financial Conduct Authority (FCA) is responsible for regulating loan-based crowdfunding platforms and investment-based crowdfunding platforms and last year set out new rules governing such crowdfunding activity.
Other forms of crowdfunding, such as reward-based or donation-based funding, are not regulated by the FCA, but such funding is not, on the whole, suitable for all businesses, being particularly appropriate for businesses in the social or creative sectors. The general theme of the law in relation to crowdfunding is to protect investors, in order to ensure that they have sufficient information on the risks involved with making their investments.
So is it for you? The breadth of the different types of funding available means that businesses from a wide range of sectors can access funding for various purposes. This has the effect of creating significant differences in the amounts raised and the uses to which they are put.
Recently published figures, based upon an analysis of transaction data from crowdfunding platforms and surveys of their users, calculated that in 2014 the average amount raised via equity-based crowdfunding was £199,095, the average amount raised via debt securities-based crowdfunding was £730,000 and the average amount borrowed via peer-to-peer business lending was £73,222. Whilst these averages will hide far more significant fundraisings, a trawl of various crowdfunding platforms supports the position that the amounts raised can often be relatively modest.
Businesses looking at crowdfunding will need to consider how to make their funding opportunity attractive to the crowd, whilst balancing compliance with investor protection law. Those businesses that are able to offer investors rewards or discounts on products or services lend themselves to crowdfunding.
Businesses which have received crowdfunding will have ongoing information and compliance obligations to the crowd, the extent of which will be dependent upon the nature of the investment instrument involved and the size and make-up of the crowd. The perception of existing and potential future funders of the crowd and the investment instrument involved will also need to be borne in mind.
In summary, the extent and breadth of the UK market is likely to mean that many businesses will contemplate crowdfunding when looking for funding. Like other sources of funding, such as bank funding, the stock exchange or private equity, crowdfunding is not going to be suitable for all businesses, and so any business considering accessing funding via this route should ensure that it is sufficiently informed about it.
For further information on crowdfunding or any of the issues raised by this article, please contact Richard Butts at firstname.lastname@example.org or on 0191 204 4272.