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Home > Regulation > UK Regulation

FSA warns investors over ‘crowdfunding’ schemes

Returns on crowdfunding investments are rarely high but investments can be part of a diversified portfolio, says regulator.

By Michael Trudeau | Published Aug 13, 2012 | comments

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.

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