The Financial Conduct Authority (FCA) undertook a consultation on tighter regulation of crowdfunding last December. It was clear that technologic innovation to support both debt and equity capital raising via on-line platforms was often unregulated and that as a results investors might be duped into investing in dubious propositions. The FCA have now covered the results of the consultation and published the detail rules that will apply in future – which are much the same as they consulted on. See www.fca.org.uk/news/firms/ps14-04-crowdfunding for their published response.
ShareSoc responded to the original consultation and we agreed with most of the proposals (our response is on the ShareSoc web site). There were quite a number of people who suggested that applying the proposed rules would inhibit the growth of these new platforms which could provide a valuable source of debt and equity to new businesses. But the FCA (and ShareSoc, plus others) emphasised the risks involved in such investments which were often not clear to the investors. It is unknown whether there will ever be reasonable returns from them. Indeed the FCA’s document says “No one disagreed with our assessment of the significant risk of failure applying to the start-up companies that might seek access to finance” and the few responses they received directly from retail investors made it clear that regulation of the market was welcome.
The new rules will mean retail investors will either have to be “advised”, or certified as sophisticated or high net worth individuals , or confirm that they will not invest more than 10% of their net investible assets in these products. Surely not an unreasonable requirement?
Firms operating in this area will in future need to have minimum capital but following the consultation the level required has been relaxed somewhat. There are lots of other regulations that will apply, such as the need for loan-based crowd funding platforms to make arrangements to provide continuity of management if the firm fails but the FCA notes that “we do not consider it desirable to try to remove all risk”. Investors have been warned therefore that you should not rely on these regulations to ensure any such investments are safe.
Some of the new rules will apply from April 2014 although there are “transitional” arrangements to enable firms to get their house in order in time.
Anyone planning to invest via crowdfunding platforms will be wise to read the FCA documents.
Roger Lawson
