Crowdfunding: a legal update

Crowdfunding: a legal update

What is the legal landscape like for crowd funding? We asked a solicitor to give up an update.

 

Crowdfunding provides a means for businesses to raise capital in return for equity via online platforms. Given the user-friendly nature and mass market appeal of the platforms, supporters of crowdfunding have hailed its arrival as the “democratisation” of investing.

Companies also benefit from the increased exposure and so-called network effects gained from contributions from a large number of what can be very small investments.

Crowdfunding has emerged as an innovative source of funding for early-stage tech companies with a great idea but little trading history and therefore little chance of obtaining debt or equity funding through the traditional channels.

As banks have become increasingly more cautious in their approach to lending, crowdfunding has emerged as an alternative option for businesses and in particular start-ups to reach a large range of investors including sophisticated angel investors, syndicates, institutions and private retail investors seeking market and interest rate beating returns.

For businesses struggling to obtain credit from a bank, the appeal of crowdfunding is clear.

Much like a stock exchange, each individual crowdfunding platform sets its own rules for listing and so the level of trading history required can be little to none depending on the requirements set by the particular platform. While many entrepreneurs might be concerned that offering equity at such an early stage will set them on a slippery path to a loss of control, they can take comfort from market practice dictating that only the largest investors (£10,000 plus) are usually offered voting shares.

It is clear that crowdfunding acts as an excellent conduit for the growth of small businesses and a place for “return-hungry” private investors to put their money but how does this “disruptive” funding model fit into the current regulatory landscape?

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