30 September 2016 by Matthew Miller

The Rise of Crowdfunding

In an e-news bulletin earlier this year, we highlighted the difference between some crowdfunding sites, which are governed by the laws on ‘financial promotion’ and therefore regulated by the Financial Conduct Authority (FCA), and some which are not. There are now over 100 active crowdfunding platforms which are either authorised by the FCA or seeking authorisation.

Keeping tabs on the unregulated platforms is more difficult, but what we do know is that growth in the sector overall has been exponential during the last few years. The results of a consultation exercise by the FCA in July 2016 suggest that at least £2.7 billion was raised through crowdfunding platforms in 2015; a 500% increase on the amount raised in 2013.

This is principally down to the realisation, particularly since the global downturn In 2008, that crowdfunding offers an effective and accessible model where companies who need equity or debt finance, typically start-ups and early-stage businesses, can connect directly with private investors who are often prepared to take bigger risks for bigger returns. This circumvents the ‘traditional’ fundraising market which is still dominated by investment banks and funds, as the ‘middle-men’.

Technology has obviously had a huge role to play as well. In turn, government and regulators have largely encouraged the growth in the crowdfunding sector because of the increasingly diverse range of investment sources that are now available to SMEs through a range of different platforms. But it is still possible to classify those platforms into five fairly distinct categories:

  • Investment-based platforms: where companies can raise equity finance from investors who buy shares (or other securities) and who often have to satisfy certain regulatory, and other, criteria to become ‘members’ of the relevant platform.
  • Loan-based platforms: where businesses (and individuals) can borrow on fixed repayment terms, and at fixed interest rates, from lenders who, again, are often vetted and selected as suitable members of the platform. This is also known as ‘peer-to-peer’ (P2P) lending.
  • Rewards-based platforms: where businesses effectively ‘pre-sell’ new products and services, usually at a discount, in order to fund their R&D, production and other start-up costs.
  • Donation-based platforms: which typically seek donations for charitable, social/community or artistic projects; typically, donors do not directly receive anything in return for their money.
  • Sector-specific platforms: which also fall into one of the four categories above but which focus on a particular sector or market e.g. property/real estate investment or invoice trading/financing.

Crowdfunding platforms are now used to connect all types of businesses – from start-ups to mature businesses and listed companies – with a wide range of private, professional and institutional investors. The crowdfunding model has come a long way, and the growth looks set to continue.

If you need legal support in raising funds for your business, or investing in a business, through a crowdfunding platform, please contact Matt Miller for assistance and advice: matthewmiller@boltburdon.co.uk or 020 7288 4739.

You can also contact one of our other solicitors in the Corporate and Commercial team here.

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