‘Democratic’ crowdfunding under threat
Regulation could stifle the online money-raising phenomenon that is filling the gap left by banks
Margareta Pagano is a former business editor of the Independent on Sunday who now writes columns and business interviews for a range of publications, including the Independent, Independent on Sunday and London Evening Standard.
Sunday 15 December 2013
Leading MPs and senior figures in the UK's crowdfunding industry are calling on the Financial Conduct Authority to halt the current consultation over regulation, because they claim the process is deeply flawed and may strangle the industry at birth.
They are particularly concerned about the propsed rules relating to equity crowdfunding. Top investor, Jon Moulton, Karen Darby, founder of CrowdMission and Barry James of the Crowdfunding Centre, are among industry players who want the FCA to stop the present consultation period that is due to close this Thursday and to start afresh in the new year.
Mr Moulton said: "The FCA rules propose stopping those that are not classed as sophisticated or high net worth investing more than 10 per cent of their net investible portfolio in unlisted shares, unless advised. This is wrong." Ms Darby, who runs the first equity-based platform for social impact businesses added: 'It is ironic that equity means fairness. It is about sharing and being inclusive. However, there is nothing fair or inclusive about the FCA's stance on equity crowdfunding.'
Reaching the “crowd” via the internet was first used by music bands in the US more than a decade ago as a way of raising finance in return for rewards such as albums. More recently, Sir David Attenborough backed a new fundraising campaign to protect gorillas.
But over the past few years, the industry has soared. It now includes crowdfunding platforms allowing entrepreneurs to raise money in return for equity – or shares – on platforms such as Crowdcube, and raise loans with peer-to-peer lenders such as Funding Circle and the latest new entrant, Archover.
Mr James said: “Many in the industry believe the regulator has failed to make the process open to, and inclusive of, all the stakeholders in the UK. For example, it has not consulted entrepreneurs and other businessmen and women who might use these crowd equity platforms or investors who might be interested in investing in them. There is a danger that the FCA will make crowdfunding regulation so onerous for potential investors that it will close down this new means of raising finance which has huge potential to create new jobs and help economic growth. We want regulation but not bad regulation. That kills jobs.”
One of the industry’s leading advocates, Barry Sheerman, the Labour MP who is co-chair of the Crowdfunding and Non-Banking Finance All-Party Group with Julian Huppert MP, backs the industry’s decision for a fresh start. On Wednesday, Mr Sheerman is heading a parliamentary debate at Westminster Hall at which he will explain how crowdfunding is an essential new tool for helping start-ups and companies to raise new finance at a time when bank lending to small and medium enterprises (SMEs) is declining.
Mr Sheerman has been highly critical of the FCA’s hard approach to crowdfunding, urging the Chancellor and the Bank of England Governor to ensure that the FCA takes a more open view. He is concerned by the FCA’s proposals on equity crowdfunding that allow only people who are considered to be “high net worth individuals” or sophisticated investors to invest in companies raising money in return for shares through internet-based platforms. So long as equity crowdfunding sites carry heavy-weight risk warnings, he and industry supporters believe the public should be allowed to invest as little or as much as it wishes.
Another high-profile supporter of crowdfunding is Andy Haldane, one of the Bank of England’s top directors, who has also predicted that the use of technology will bring about a revolution in finance.
A new report by UCL Berkeley, Cambridge University and Nesta predicts the finance raised next year from crowdfunding will be £1.6bn, almost as much as the total raised from 2011 to 2013. About £840m of this will be business finance for startups and SMEs. Equity crowdfunding, the type of finance which would be most hit by the FCA’s proposals if they go through as they stand, grew by more than 600 per cent from last year.
Mr James said: “Crowdfunding is the beginning of the post-digital economy bringing new freedoms. It’s also democratic, allowing citizens to invest in the businesses of their friends and families in a new way. We must not allow the FCA to kill this off this industry before it’s even started.”
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