James Moore: When the crowd starts funding it’s time to look for an exit

Outlook There’s a saying on Wall Street: when strippers and cab drivers give you stock tips it really is time to bale out. It hails from the 1990s when the Street of Dreams was at its most vulgar.

You could just as easily apply it to the crowdfunding craze of today.

Crowdfunding is everywhere, with a plethora of websites and platforms falling over each other to urge punters to invest in “exciting portfolios of fast-growing companies for as little as £50”.

Then there is crowdfunding’s bastard cousin: peer-to-peer lending. Get 6 per cent on your money! No investment is risk free, but no one’s ever lost money with us!

Until, that is, they do. As that rather nasty piece of Wall Street wisdom suggests, when everyone’s getting involved it’s time to get very nervous.

Here’s how it should work: the latest entrant into this crowded field is Finncap, one of those smallish British brokers that specialises in providing advice to small and growing companies. Its proposition is aimed squarely at professional investors, and wealthy ones at that, who can afford to lose quite a lot of cash in the quest to find the wheat of the next Facebook or Google amid the start-up chaff.

Finncap’s aim is, in time, to get its “crowd” involved with the broker’s established fund-raising efforts for clients with listings on the London Stock Exchange’s Alternative Investment Market. By offering, say, £1m of a £5m share issue to the Finncap crowd it will afford participants the sort of access that is currently only available to institutions.

If it works as chief executive Sam Smith wants it to, then it may provide a chink of light in the darkness that will descend on this sector when the crash finally comes.

Because that’s where this is headed. Crowdfunding and peer-to-peer lending are genuinely good ideas. At a time when bank finance is in short supply they’ve not only helped start-ups to get going, they’ve got films and plays produced whose scripts would otherwise have languished in development hell. In addition to making supporters happy, they’ve sometimes made them a few quid as well. Sounds marvellous doesn’t it?

So good, it will inevitably draw in the wrong type of people.

That’s why the Financial Conduct Authority, which will get the blame when things go wrong, is twitchy. It’s issued some regulations. The FCA would probably like to ban anyone other than Finncap’s pros from getting involved. But it can’t do that without seeming heavy-handed so it’s reduced to urging people to put no more than 10 per cent of their capital at risk. Whether they’ll hear its plea is open to question.

The latest insolvency statistics show personal and corporate bankruptcies running at their lowest levels for years. So things are good for the crowd. But this happy situation won’t last forever. Finncap’s clients should understand that. Too many don’t.