I read last week’s crowdfunding analysis piece in Money Marketing with great interest.
Crowdfunding is getting plenty of attention in the national press. And it’s not without its critics. Quite rightly there is a degree of scepticism. Any emerging investment opportunity must be thoroughly researched and the appropriateness to potential investors questioned.
There are many crowdfunding opportunities out there, and a number of platforms – some regulated, some not – offering people a chance to get involved. These ‘investment opportunities’ range from risky start-up businesses, with little or no security – a speculative punt if you will – to more secure fixed return debenture style investments using already established projects that have had a good deal of scrutiny and due diligence undertaken before being set up as investment vehicles.
But, when it comes to comparing opportunities and advising clients, it’s sometimes hard to see the wood for the trees.
Unfortunately, at the moment at least, all crowdfunding opportunities are tarred with the same brush. That’s understandable as it’s still a relatively new sector.
However, for clarity, crowdfunding involving repayable finance/investment is a regulated activity. Firms are authorised by the FCA, the main ones being Abundance Generation, Seedrs and Crowdcube. There are others operating as appointed representatives of authorised firms (Trillion Fund for example).
Donation or reward crowdfunding and peer to peer platforms utilising simple bilateral loans are “outside the scope of regulation” (p2p is regulated in part by the OFT).
There are some models of crowdfunding which are exempt but this is not the same as being “unregulated”.
The soon to be published consultation from the FCA is about clarifying the regulatory framework so that it is more appropriate and proportionate – balancing the need to provide protection for consumers and helping develop a robust, well run, growing industry sector.
The industry, through its main trade association the UKCFA, is asking for regulation that is appropriate and proportionate.
Like any investment, there are risks involved in crowdfunding, but those risks differ wildly depending on the actual project you’re investing in. The old adage ‘if it looks too good to be true’ has never been more appropriate, so caution must be exercised before advising clients in this area.
As Plutus Wealth’s James Robson said in last week’s Money Marketing analysis, advisers are going to have to be able to talk knowledgeably about crowdfunding with their clients.
And they shouldn’t make the mistake of assuming that all crowdfunding opportunities are created equal. They are not. Some raise debt, some issue equity, while some look for donations. The businesses seeking the money vary significantly too – from speculative and risky ones to sensible businesses with reliable and predictable revenues. There are some very good investments out there that could help diversify a portfolio, hedge against inflation and provide market level returns. It would be a shame to ignore these opportunities.
One suggestion for advisers would be to find a crowdfunding platform that they like, with a team and a due diligence process that they trust and a business model they understand.
Guy Tolhurst is Managing Director at Intelligent Partnership