The Independent: On the Need for Regulation in Crowdfunding
Debt crowdfunding, or peer-to-peer (p2p) lending is probably more familiar in the UK. Here, investors can use online platforms such asZopa.com, the pioneer in the UK which arranges more than £8m new loans every month, to lend out their money to individuals, enabling savers and borrowers to remove the traditional banks from the equation. Projected returns for Zopa lenders after fees are 4.7 per cent over five years and to spread risk all loans are split into small portions to many borrowers.
On the equity side, you have the opportunity to invest in the “next big thing” in exchange for a stake in that project. Small businesses use online platforms such as Banktothefuture.com, Seedrs.com and Crowdcube.comto organise and administer the fundraising.
There is usually a specific target to reach within a timeframe and if this is met, investors receive shares in the business they have helped. You can invest as little as £10 and if the start-up doesn’t meet its target, you’ll get all of your money back. Tax-wise, you could also benefit from Enterprise Investment Scheme and Seed Enterprise Investment Scheme relief on your contributions.
If you “back the right horse” returns could be impressive and crowdfunding may well have a role to play in a diversified portfolio, but be clear that this is high-risk investment.
The Financial Conduct Authority (FCA) has said this should be targeted at sophisticated investors who know how to value a start-up business and understand the risks involved. They have also raised concerns that some crowdfunding firms may be handling money without FCA permission or authorisation, and therefore may not have adequate protection. “From a social enterprise perspective, I’m a massive fan of crowdfunding – it can be tremendously useful because people are motivated to help – but equity crowdfunding has a much higher risk profile,” says Mark Hollingworth of Integral Finance, which offers financial management to life science and technology companies.
Only a handful of platforms are regulated by the FCA; Crowdcube, Seedrs and Abundance Generation. There is no protection from the Financial Services Compensation Scheme, although the UK Crowdfunding Association does have its own code of conduct for members with guidelines regarding cooling-off periods for investors and ensuring money is ring-fenced in case the platform goes bust. The bottom line, however, is that no platform can promise you won’t lose some, or all of your money.
Source: The Independent