Crowdfunding investments: three's a crowd

three is a crowd

By Peter Robinson

I’ve been helping a number of clients recently with crowdfunding investments. It’s clear that the UK isn’t as advanced in its thinking as the USA on this, and also pretty clear that there’s confusion generally as to what “crowdfunding” actually is.

Boiled down to its essential structure crowdfunding is a way in which businesses can raise individual pots of smallish money from a large number of people in one go, typically via an on line platform. Whilst the basic idea itself isn’t new, crowdfunding as a source of alternative finance has grown in recent times as more traditional sources of funding have dried up. The increased usage and acceptance of social media in our every-day lives has also brought quite a lot of focus onto it.

Crowdfunding can come in different guises. Generally these fall into equity investments, loan based lending, prepayments, exempt structures, and donation based payments. Unless the investment is just viewed as a punt or a donation (i.e. with no expectation of a return), then there are a number of things to think about (most of these aren’t new either) e.g.:

1. As an investor, how much do you know about the business, the industry, and the risk in the investee company? You won’t really be able to do a proper due diligence on the business so how happy are you with what you are being told and the risk/reward?

2. As a business, how do you manage your “crowd’s” expectations and what happens if you fail to deliver?

3. For all users: the area is a regulatory and legal quagmire and whether or not an online crowdfunder/business seeking funding has FCA authorisation, needs FCA authorisation, or has just side stepped regulations designed to protect users and consumers is not always clear.

Crowdfunding is here to stay, and rightly so: any viable or innovative source of funding should be encouraged. Anyone considering it, whether they be a business seeking the crowd, or a consumer wanting to invest, should explore it thoroughly and be just be cognisant of the risks. Just like, well, any other investment.

 

 


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