New regulation of crowdfunding

The latest business advice series from Remedy concerns the new regulation of crowdfunding.

Since the beginning of the financial crisis of 2008, it has been increasingly difficult for start-ups and small businesses to access high-street bank finance, either at all or at least at an affordable price. To fill that void an alternative finance market has developed and has included new funders offering invoice and asset finance products, as well as the whole market of crowdfunding.

Crowdfunding is a web based market that allows start-up and early stage businesses to raise money by attracting lots of individual investors, (not necessarily experienced business angels or venture capitalists), to invest small amounts in a business.  As it’s been such a new industry it has been unregulated up until now, but there were concerns that inexperienced investors could be exposed and not be aware that they could lose their investment if the business failed. From the beginning of April 2014 new regulations for the crowdfunding finance market come into existence and will be enforced by the Financial Conduct Authority (FCA).

The FCA has stated that its new regulations will protect consumers and increase competition in the crowdfunding market. Under new rules, inexperienced investors will have to certify that they will not invest more than 10% of their portfolio in unlisted businesses.  The changes have received a mixed reaction as was to be expected. Some have claimed that the new rule changes will take the “crowd” out of crowdfunding by creating unnecessary red-tape. However, the opposing view is that the FCA has kept the ‘crowd’ in crowdfunding, by allowing anyone to invest up to 10% of their available assets. That would then ensure crowdfunding remains available to all types of investor and puts in place consumer protection that currently doesn’t exist.

The whole crowdfunding market has only come into being as a result of the banking system drawing back its funding to business. As bank funding becomes more widely available, and cheaper again, in the coming months and years, it remains to be seen if the alternative finance market and crowdfunding will continue to be attractive to investors as a source of finance. It is still increasing in popularity and it will be a while before we know if the new regulation dampens some of that enthusiasm for crowdfunding, and gets seen as another funding stream similar in structure to bank funding.


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