View more on these topics

FCA warns crowdfunding sites on social media use

The FCA has written to crowdfunding websites raising concerns they are not using the appropriate risk disclaimers when promoting their business on social media.

Equity crowdfunding allows small, private companies to raise money from online investors by selling stakes from £10.

The Times reports the regulator has told the sites to put risk warnings into every Twitter message or “tweet”. A start-up seeking funding using equity crowdfunding, industry comparison website The Crowdfunding Centre, and leading crowdfunding platforms Seedrs and Crowdcube are all understood to have received the warnings.

The FCA is concerned potential investors do not fully understand the risks of crowdfunding, including that most start-ups fail, equity stakes are difficult to sell and consumers may see shares diluted by future investors.

But the industry has told The Times that adding these risk warnings will hurt businesses’ ability to discuss funding rounds.

The Crowdfunding Centre founder Barry James told the newspaper: “Social media is the life-blood of crowdfunding. It ceases to be viable without it … There are full risk warnings once you click through [to a site], way before anyone can consider parting with any cash.”

Seedrs co-founder Jeff Lynn said: “It doesn’t make sense for every tweet to have a full risk warning.”

An FCA spokesman said: “We are in contact with firms operating crowdfunding platforms to make sure they understand their responsibility to give potential investors information that is clear, fair and doesn’t mislead.”

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. There is one absolutely secure way of ensuring that no-one grows up deviant – throttle all babies at birth. I suspect that this is a technique the Regulator would consider if left in charge of that area.
    One hypothesis in that the more people are protected from their own actions, the greater the level of risk they will take on board, to the extent that the whole process becomes self contradicting.
    I recently started to read the FCA Occasional Paper ” Applying behavioural economics at the FCA”. I didn’t know whether to laugh or to cry at the inanity of the interpretation of human behaviour.
    This is yet further confirmation that they are totally out of their depth at managing human interaction. Or even the entrepreneurial environment.
    So let’s keep it simple – kill everything at birth.

  2. Glen – you are 100% spot on.

    But it’s WAY worse than this or the Times story would suggest. The whole ‘Risk Warnings’ thing is the stinkiest of stinky Red Herrings – especially coming from a regulator who are being the opposite of their own mantra: ‘Clear, Fair and not Misleading’ – they fail abysmally on all three and their hypocrisy in trotting this out as a garnish to that stinky herring is as rank.

    They’ve told us – in legal letters – that we cannot signpost – or even mention – any equity crowdfunds. Any mention, even signposting, will be classed as an ‘illegal financial promotion’. Remember these are on platforms that they’ve authorised and regulated.

    They’ve also made it crystal clear (they can when they want to be) to a room full of stakeholders that they fully intend to extend this to all Tweets and Social Media, including YouTube etc – posted by anyone, retweeted by anyone. The risk warning things is intended to mislead.

    They’ve not made clear that they know and understand that this will infringe free speech and extend the strictures of FSMA ‘financial promotions’ rules to ordinary people – the crowd. They seek to do this without proper democratic scrutiny.

    They’ve apparently briefed the Treasury that a major consultation has been ongoing on all this since April 2013 – for which there is no trace. Misleading – parliament this time? (BTW if you’ve had anything from them – and I don’t mean CP13/13- that could even remotely be classed as a consultation on this please let us know via TheCrowdfundingCentre email).

    As the times piece noted we have compiled a submission for ministers on this – if you’d like to add anything please do let us know. It’s going to be up to us all if this is going to have even the slightest resemblance to anything either fair, clear or not misleading!

  3. The regulator can never win in situations like this.

    Let it happen and should it all go wrong there will be calls as to why it let people invest money via facebook (or whatever) and surely they could see this happening/asleep on the job/stable door etc.

    Stop it at the start and its stifiling innovation.

  4. Matthew

    Having looked at this in great detail over a period of many months – and heard exactly that story from the FCA at pretty much every level – I have to say I can’t accept it – neither should we. The cost to society as a whole is almost beyond imagination already – and is about to get steeper still if we let it.

    They need to start to behave like the mature adult professionals they’re paid, with taxpayers money, to be, not whipping boys.

    Politicians are not without their share of the responsibility for this parlous state of affairs.

    But it is entirely in their hands to refer these matters to HMT and government where setting new president with the web or social media and where they know full well that they are infringing on liberties.

    Instead this stasi-like behavior, guinea-pigging firms and policies and trying to fly this stuff in under the radar does not even begin to meet the most basic standards of ‘legal and decent’ let alone their own ‘clear, fair and NOT misleading’!

  5. Matthew, agreed the Regulator has a difficult job, but putting the hub nail boot into everything does not indicate that they understand how to manage a market.
    A simple – “We are aware of the market. So long as funds ensure that potential investors are aware of the high risk we will leave it to develop. We’re not going to stampede just because the Daily Mail get’s its knickers in a twist, but we will take notice of a serious level of bad press.”
    Then work with the CrowdFunding Crowd.
    The problem with a sledgehammer approach is that it damages the marginal investor who is serious about investing a little money but is suddenly scared by the warnings – not the actual market.
    Yes it is difficult getting the right balance, but given the level of salaries paid in the FCA one has to assume that one or two intelligent people have evaded the sifting process and can therefore understand the concept of managing the market rather than controlling it. However I wouldn’t put any money on the the assumption being right!

  6. Barry, couple of points – firstly – i think you need to look up at the definition of a financial promotion. as much as you may hate it, if it is regulated, you need to be regulated!
    Secondly – even if you are making pointers on ‘authorised and regulated’ platforms, it is the platform that is authorised and regulated NOT YOU.
    Thirdly – (and possibly the most annoying for US authorised and regulated firms) the FCA is NOT funded by the tax payer, it is funded by the authorised and regulated of which you are not one!

    If I am wrong in your authorised status, i apologise, but if this is the first you have heard from the FCA, get used to it! And it you want to tell the taxpayers about new financial promotions, seek the correct authorisation and regulation or of course simply join one of the companies offers ‘no advice, whatsoever, but tells you exactly where to invest’ brigade.

    And to be clear, i have no issue with crowdfunding whatsoever, but as you are probably quickly finding out, if you want to make money in FS you have to deal with the FCA – join the club, you wont find anyone on this site disagreeing with you or feeling sorry for you because you have incurred the wrath of the FCA, sorry about that!!!

  7. Barry, I’m not certain I unerstand what you mean by ‘the cost to society’?

    I am certain that the cost to the industry when investments go wrong is significant and everyone (including the innocent) pays for it.

    The biggest ‘scandels’ this industry has had in recent years has been down to unregulated (and even regulated but poorly run) investments.

    I’m all for innovation aimed at the provision of advice, but when it comes to investments I am very wary. I would certainly take issue with any investment that advertises on social media witout any risk warnings.

    I do believe there is a market for crowd funding, but as this is a relitively new approach to capital raising/equity purchase it should be carefully supervised to ensure consumers are afforded the right information before investing.

  8. headbelowthe parapet 14th July 2014 at 6:03 pm

    Barry

    The FCA’s approach to financial promotion is pretty simple:
    – Is it clear?
    – Is it fair?
    – Is it misleading?

    If your promotions do not meet these standards then the FCA will fine you, and/or close you down (that is unless you’re a pension unlocker and/or a seller of unregulated collective investment schemes).

    The FCA are beyond reproach. Now stop bleating, pay some fees and attempt abide by the FCA principles.

    Oh, and welcome to financial regulation…

  9. Crowdfunding websites rely on “impulse investing” by people chucking away £10 on something cool that they’ve seen on Facebook or Techcrunch, without stopping to think about the credentials of the man asking for it or how likely the project is to come to fruition. Many of these projects simply disappear without trace or after releasing a half-arsed demo or prototype nowhere near viability. If they had to set out the risks, like “I have no idea whether this is technologically feasible” or “If it is technologically feasible it may cost far too much to be economically saleable” or “There’s nothing to prevent me simply draining the $1m raised into my bank account, shrugging my shoulders and saying ‘Sorry, it didn’t work out’ “, their income would drop off a cliff.

    A crowdfunding page has three crucial features:
    – everything is presented in positive terms, with no mention of the risks
    – the whole presentation is designed to induce herd instinct (which crowdfunders hilariously call “the wisdom of crowds”) – X other people have pledged $X00,000, therefore it must be good
    – when you ‘pledge’ £10 it doesn’t immediately come out of your bank account, so the punter doesn’t put as much thought into the decision as he would if he was lifting a tenner out of his wallet

    The FCA wants to create an economist’s perfect world where every investor has “perfect information”, i.e. knows all the information and risks that could possibly be relevant, and makes a rational decision taking all those factors into account. Pure anathema to the crowdfunding industry which relies on people not even asking what the risks are and making an instant decision based on herd instinct.

  10. Ed: Can you please let me know whether you’re planning to release my responses – including my previous ,holding, one, as otherwise I will make my responses elsewhere and/or via my blog

    Barry.James@TheCorwdfundingCentre.com

  11. Casual Observer 16th July 2014 at 3:15 pm

    Barry,

    The FCA rules are quite clear about what is and what is not a financial promotion. Anything that reaches the consumer is a potential advert and could also be a financial promotion. That includes websites, email circulars and blogs, posts etc. You then have to consider whether or not it will be a financial promotion in each case. The FCA have also previously made clear that use of social media is caught within these rules.

    If you have failed to understand all of this then you have failed to understand the basics of being regulated by the FCA.

    Your professional advisers who supported you in your application should have made the requirements clear to you and advised on appropriate procedures and controls.

    There is no reason why crowdfunding should be considered any less of a risk to investors than any other regulated investment and the fact that it makes it harder to market properly just brings you into line with the general standards expected. You aren’t being singled out here. There are some investments that are a lot less risky than yours which have to follow the same rules.

    When the FCA consulted on regulating peer to peer/crowd funding this automatically meant that as a regulated entity a firm would be have to follow all the requirements of being a regulated firm. Financial Promotions is just one of these requirements.

    I am not against crowdfunding, it has certainly been a help. However there are risks to consumers which is why it has become regulated in the first place. Just because your entity may be a good egg doesn’t mean they all are so rules apply to everyone regardless.

  12. Ah yes, the arguments I heard as an apprentice as ones nether regions were getting shaved – or indeed when consultants are justifying ludicrous and dangerous working hours for trainee doctors – “We had to go through it, so should you.” Moronic then as it is now in this context.

    If regulations were the solution we wouldn’t have had a crash, so please all you folks in “FS” spare me the sanctimony – its largely BS!

    The genie is out, long may it remain so

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com