FSA warns investors over ‘crowdfunding’ schemes
The Financial Services Authority has posted a warning to investors concerning crowdfunding, wherein a start-up business uses a website to ask for contributions of capital, sometimes promising investors shares in the new company if the target is met.
Crowdfunding sites allow people to pitch a business or product idea along with a stated goal for start-up capital. If people like the idea, they can contribute to the cause.
In most cases payments are only kept if the ‘critical mass’ of start-up capital is reached, at which point the business will launch.
One example of a crowdfunding site is Kickstarter.com.
The FSA warned investors that such schemes are complex and high-risk and that higher returns from such investments are rare.
The regulator points out that most start-up businesses fail so investors risk losing their entire investment. Those that do not fail can take a long time to become profitable so investors must be prepared to wait.
Although it concedes that crowdfunding could be integrated into a diversified portfolio for sophisticated investors, the regulator warns that serious investors should know how to value a start-up business and protect themselves against fraud.