Dev / stage environment

How well is the crowdfunding industry regulated

"CEO Ayan Mitra discusses the merits of the current regulation landscape for crowdfunding and advantages and disadvantages of the current system"
  • Written By: Maria
  • Role: Marketing
  • Date: 16th October 2013
  • Time: 04:30 pm

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How well is the crowdfunding industry regulated

Crowdfunding encompasses a number of different mechanisms to facilitate an exchange between individuals.

• Donations - People can donate money towards a cause or an idea that they are passionate about and in exchange they get no financial returns. This does not fall under any regulatory jurisdiction.

• Rewards – People can contribute towards an idea in return for a non-financial reward, which is usually an early release of the product or service. This again does not fall under any regulatory jurisdiction although it could have tax implications for the business receiving the funds.

• Debt (P2P Lending) – People lend money to individuals or businesses in return for interest paid on the capital they lend or revenue share in the business. Currently this is not within the regulatory jurisdiction of the Financial Conduct Authority although this is about to change.

• Equity – Investors invest in businesses in return for shares in the business, which in turn may pay dividends back to the investors. Most of the regulation that is currently being talked about applies to this.

Equity crowdfunding essentially is offering investment opportunities in companies to investors so if you look at regulations as it stands today there are very clear rules as to how this is regulated.

Firstly, this is around the obligations and regulatory requirements of the intermediate platform, which is effectively offering these investment opportunities. They need to have the appropriate permissions from the Financial Conduct Authority of doing so as arranging and bringing about a deal is a regulated activity.

The second aspect to be aware of is the Financial Promotions Act, which explicitly outlines the rules around how these investments may be marketed to the type of investors and by whom. Again it is very clear as to how this should be done and what the intermediate platforms need to have in terms of permissions before they can market these investments especially around investor classification, treating them as clients and the obligations that go with it.

The third aspect that should be called out is the companies act legislation around offering shares to the public and the associated corporate structure (plc) required to ensure appropriate governance is in place for the companies receiving the investments.

Different platform operators have applied their own interpretation of the regulation in order to comply but the regulation is very much there.

So in summary I think it's quite well regulated, whether regulations is followed and enforced is a different matter altogether.

At CrowdBnk we approve each individual equity crowdfunding investment opportunity on our platform as a financial promotion they are only promoted to investors who are appropriate for it.

We have the relevant Financial Conduct Authority permissions to actually market these to all appropriate investors types including retail. We put in an appropriate number of due diligence hours before we actually show these investment opportunities to people.We make sure that we offer plc structures if they apply.