Crowd Funding Regulation

In the Times yesterday was this headline

Crowdfunding clampdown may hit small firms hard

and below is my take on this from over a year ago

Crowd Funding & the FSA – or UK vs. the USA

Posted by Tim Luscombe at 01:00, October 3 2012.

I have been looking at Crowd Funding for one of my clients, let’s call them XYZ

Crowd Funding is where many investors pool small amounts of money to invest in a business, or perhaps to support a charity or an artist.

XYZ have a substantial user base who have paid several hundred pounds for the first generation products.

They need to raise some funding for the development of the next generation of products, so asking the existing customers to contribute £20 or even £50 (perhaps in return for a discount on the purchase of the new product) seems to make some sense. The individual risk is pretty small, the company gets to develop the next generation of products, everyone wins.

Then you look at the FSA guidance on Crowd Funding and their conclusions quoted below:

Keep in mind that almost all crowdfunds are not authorised by us and you will not have access to the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS) if things go wrong.

We believe most crowdfunding should be targeted at sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money.

We want it to be clear that investors in a crowdfund have little or no protection if the business or project fails, and that they will probably lose all their investment if it does.

We are also concerned that some firms involved in crowdfunding may be handling client money without our permission or authorisation, and therefore may not have adequate protection in place for investors.

I find this difficult to accept as an appropriate response to the circumstances we are considering. I can see how this guidance might apply to investors looking to back start-up businesses with substantial amounts of capital, but really? For investment of £20 or even £100 what are the FSA thinking of?

As I have previously commentated, where were the regulators when the financial crisis blew up? Where was the FSA then?

In the US, the JOBS (Jumpstart Our Business Startups) act comes into force next year. This encourages investment, regulating the middlemen and setting limits related to net worth or income for the individual investors. Why aren’t we doing something similar?