What is crowdfunding?
Crowdfunding is raising money directly from a large number of people all putting in relatively small amounts of money.
Who can be a crowdfunder?
Theoretically anyone can be a crowdfunder, investing in or donating to businesses, projects or ventures of their choice, however some crowdfunding platforms take the view that some investment products are more suitable for more sophisticated investors. What is important is that investors and donors can easily understand what they are putting their money into, what the risks are, where they are paying fees and what the possible return might be.
Is there a minimum or maximum amount for investment or donation?
These will vary according to the crowdfunding platform you use. In some cases investments and donations can be as low as £5, with no ceiling on the amount you invest, others may cap the total investment you make as a percentage of your net assets. It really depends on the nature of the project you are putting your money into and the risks you are prepared to take with your money.
What are the main risks?
Your money is at risk, and there are never any guarantees that you will get the returns or rewards indicated. Debt investments tend to carry lower risks than equity investments for example, but really all investments have different risk profiles and you should always read offer documents in full and do your research before investing. The opportunity you put money into may operate longer than the crowdfunding platform you use, so you should also check whether they abide by the UK Crowdfunding Association’s code of practice.
As a consumer how am I protected?
Most crowdfunding opportunities fall outside the Financial Services Compensation scheme. As a crowdfunder you are making your own assessment of opportunity and risk. Platforms that are authorised and regulated by the FCA must also comply with a number of rules with respect to how their customers are treated.
What is the difference between a donation and an investment?
A donation is essentially a gift: you give money to a project that you like – they may or may not offer a reward such as the product, a T-shirt or your name being included in credits etc.
An investment is where you pay money to a company in the hope of making a return over time.
Why are some crowdfunding platforms regulated and not others?
Every crowdfunding platform has made its own assessment as to whether it needs to be regulated by the FCA or any other body in order to conduct its business. The UK Crowdfunding Association does not take a position as to when regulation is and isn’t required.
Why do you need a code of practice?
In the interest of protecting consumers and promoting the growth of crowdfunding, the leading platforms feel it is important that there be a common set of standards to which everyone adheres.
How do I know a crowdfunding platform is following this code?
Crowdfunding platforms with the black UK Crowdfunding Association’s logo have signed up to this code of practice. Platforms that can not meet this requirement will not be invited to join the Association and will have their membership withdrawn if they fail to meet it on an ongoing basis.
What happens if a business or venture I invest in or donate to goes bust?
Your money is always at risk and if you make an investment and the company goes into liquidation, you risk losing some or all of your investment. You will be treated like other investors of the same class by the liquidators, who will divide up any remaining assets in the business in proportion to shareholdings.
What happens if a crowdfunding platform I use goes bust?
The UK Crowdfunding Association’s code of practice requires members to segregate investors or donors money from their own, which means that your money is kept separate and still legally controlled by you, unlike in a bank. If the crowdfunding platform goes bust then such money is not accessible to its creditors and should be returned to investors or donors. Any money is held by the investee projects and are also separate from the crowdfunding platform.
What is the difference between debt and equity crowdfunding?
Debt crowdfunding is when investors lend money to a company, who then repays the investor on a regular basis. The company has to pay their debts before taking any profits, and if the company went under then debtors would get paid first. So this is a lower risk form of investment than Equity (see below).
Equity crowdfunding is when investors buy shares in a company and become part owners. They make a return on their investment either by being paid a dividend OR by selling their shares at a later date, when the company value has increased. The board of the company will decide whether to pay a dividend and how much, and if and when to sell the business, so this tends to be a higher risk form of investment as there is no guarantee of amounts or timescales for returns. Equity investments should have higher returns than debt investments, to compensate for this higher level of risk.