Over the past few years, Crowdfunding has established itself as an innovative way to raise finance for new or existing ventures. However, due to the differences in risks, it is important for investors to make the distinction between funds lent out via a loan-based crowdfunding platform, or investments made via an investment-based crowdfunding platform, to monies deposited in a deposit or current account.
There are two main types of regulated crowdfunding:
- Investment-based Crowdfunding – Investors invest in exchange for a number of shares or debentures. The investor hopes to make a return with the company on exiting. This can include a trade sale, an IPO or a share buyback.
- Loan-based Crowdfunding – Also called peer-to-peer (P2P) lending. Investors lend money, (normally to individuals or business borrowers) in the expectation of a financial return through interest payments and the repayment of capital over time.
Crowdfunding platforms may offer higher returns than those available from other financial products, though there are usually greater risks.
UK regulatory initiatives
Following the FCA’s Interim Feedback statement in December 2016, which summarised some of its initial findings and concerns about the sector, in July 2018, the FCA published a consultation paper (CP18/20) on proposals relating to crowdfunding market. The outcomes the FCA wants are:
- investors have the necessary information about a platform’s services and charges to help them make informed decisions
- investors have clear and accurate information about the investment risk of a product to make suitable investment choices in line with their risk tolerance
- investors are appropriately rewarded for the risks they are taking
- investors understand that their capital is at risk and they may suffer losses
- home finance customers have a similar level of protection to that they would have if the provider were authorised
- platforms are well-governed and compete effectively for business
- platforms structure their business in a way that aligns their fees, charges and profits with the principle of treating customers fairly
- platforms carry out risk assessment and pricing of underlying assets to a high standard
- platforms have appropriate arrangements in place to ensure that P2P agreements continue to be administered if the platform ceases to operate for any reason
Comments can be made on CP18/20 until 27 October 2018 and the FCA intends to publish a policy statement in the second quarter of 2019.
EU regulatory initiatives
The European Commission has recently published a proposed regulation for crowdfunding, to make it easier for platforms to offer their services across the EU and improve access to this source of finance for businesses in need of funding. Investors on crowdfunding platforms will benefit from a better protection regime and a higher level of guarantees, based on
- clear rules on information disclosures for project owners and crowdfunding platforms
- rules on governance and risk management
- a coherent approach to supervision.