Nicola Horlick broke a record after raising £150,000 in 22 hours through crowdfunding site Seedrs for her latest venture, Glentham Capital, while Oscar-winning director Spike Lee has turned to fans to fund his latest project through Kickstarter, a similar site for creative projects.
The idea of it is simple and almost philanthropic: investors can get a share of a stake in a start-up business for as little as £10, making commitments via an online platform.
For Bubble & Balm however, one of the first businesses to use this kind of funding in the UK, the news was less upbeat as it was struck off Companies House on Wednesday after failing to get off the ground amid wider economic turmoil.
This has led to some doom-mongers issuing words of caution about crowdfunding, and questioning the concept and its suitability for the majority of investors.
Is concern justified?
While some crowdfunding is authorised by the FCA, the majority of crowdfunds are not, meaning investors will not have access to the Financial Ombudsman Service, or the Financial Services Compensation Scheme in the event of failure.
Indeed, only those involving the sale of specified investments such as unlisted shares, debt securities or units in an unregulated collective investment scheme (Ucis) are regulated.
Ucis have of course have come under fire before, and earlier in the year their marketing to retail investors was banned by the FCA following an investigation which found that just one in four schemes sold was in line with the investor’s risk appetite.
It is important to remember the difference between the two investment types, however. The issue with Ucis was advisers mis-selling products to unsuitable investors. Crowdfunding is not advised, and is investor-driven. It seems safe to assume the majority of crowdfunders are not going to pour their life savings into a business they read about online.
Regulatory stance
A spokesperson for the FCA said most crowdfunding should be targeted at sophisticated investors, who know how to value a start-up business, understand the risks involved and realise that they could lose all their money.
In a statement, the city regulator said: “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.”
Pros and cons
As with all investments, there are pros and cons. Crowdfunding is cheap and easy to access. Investors can make their commitment online without the need to seek advice or pay fees. Some platforms offer the potential for higher returns than is generally achieved on other investment products, although of course the flip side is they are likely to be subject to more risk.
Any returns on investment may take a while to materialise and dividends are rare, while investments may become diluted if more shares are issued. There is also the risk an investor will lose all their money, as a significant number of start-up businesses fail.
As with all bets, it seems the best way to proceed with crowdfunding it to only lay down the amount you are prepared to lose.
