A new move by the FSA could see crowdfunding develop into a mainstream method of funding
The appeal of crowdfunding, the rapidly-growing phenomenon that allows those with even modest means to invest in companies and projects, may be being strengthened by the Financial Services Authority’s (FSA) authorisation of certain websites.
The FSA’s approval of equity-based crowdfunding site Crowdcube is a first for the regulator, which has until now before authorised a crowdfunding website that facilitates direct ownership of companies. Crowdfunding supports a wide variety of projects, including IT firms, bakeries and wind turbines.
Investors using Crowdcube are now able to claim from the Financial Services Compensation Scheme and access the Financial Ombudsman Service if they have a grievance.“The confidence this gives to our investors is really invaluable,” Crowdcube co-founder Luke Lang tells The Positive. “It’s a real validation.”
FSA authorisation gives assurance that companies such as Crowdcube have the required systems and processes in place, and that if something goes incorrectly for which they are responsible, they have the financial means through which to rectify it.
Lang states that Crowdcube undertakes a substantial screening process of the entrepreneurs seeking funding. “We vet businesses that come through the portals.” Their prerequisites: a coherent, professional business plan and financial forecasts. “We are unable to decide on the standard of the business. That’s down to the crowd.”
Crowdcube takes a five percent commission on funds raised. Although the minimum investment is £10, it has taken £100,000 in single investments. Lang says Crowdcube has proven more attractive for some entrepreneurs than venture capital providers and may soon be a mainstream method of funding.
Karl Harder, managing director of Abundance Generation, a renewable energy crowdfunding site, also values FSA authorisation; which his company gained in 2011. “Apart from the credibility it brings, it’s a good process for any business to go through,” Harder tells The Positive. Yet, he clearly feels that gaining approval was an arduous process. “We had over 230 different communications [with the FSA] going into every aspect of the business, about the checks and balances we put in place,” he says. “It took 15 months to get approved. However the outcome is we’re a much more robust and well-structured business.”
Abundance is different from Crowdcube in that it provides finance in the form of an interest-bearing loan.“It’s like a savings account,” Harder says.
He says debt funding gives a greater degree of reassurance to investors, as they may be repaid before those with equity stakes: “It is relatively stable for your capital.”
Abundance looks to support sustainable ethical investment, Harder explains, however also aims for “financial inclusion.” He points to the fact that many traditional investment openings require a minimum of £25,000 or more; this makes them accessible only to the wealthy. He says Abundance is aiming at “democratic finance,” adding, “We use the tools of the financial world. We’ve opened them up for mass participation.”
Abundance’s minimum investment is just £5, though it has attracted capital of up to £80,000. It tends to fund bigger projects such as a £1.4 million wind turbine development in the Forest of Dean.
Harder says the way investment companies communicate is vital, citing the FSA’s guidance that communication should be “fair and clear.” The main challenge, especially for crowdfunding companies, is to make the financial prospects involved crystal clear to potential investors. Of course, investors stand a chance of relinquishing their money by buying shares in companies quoted on the stock exchange, but the risk with start-up ventures is always that much greater.
Crowdcube goes as far as putting barriers in investors’ way. They must either self-certify as a ‘high net worth individual,’ or complete a short questionnaire. This assesses their understanding of the stakes: that these investments are high instability, highly illiquid and that the chances of dividend payments are minuscule.
“It’s for the crowd to do their own research and analysis, as well as probing and asking questions of the entrepreneur, before they make their decision,” Lang says.
How might crowdfunding be useful for independent projects?