FCA: Advice is a must for new breed of start-up investments

Firms promoting ‘crowdfunding’ start-up investing platforms must engage with financial advisers if they wish to market to non-sophisticated retail investors, the Financial Conduct Authority has said.

In a consultation paper on crowdfunding published today (24 October), the regulator proposes limiting marketing to sophisticated investors, high net worth investors and investors that receive “regulated investment advice or investment management services from an authorised person”.

It also states that non-sophisticated investors should certify they will not invest more than 10 per cent of their portfolio - “excluding their primary residence, pensions and life cover” - in unlisted shares or unlisted debt securities.

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This reflects the fact that most investments in start-up businesses result in a 100 per cent loss of investment and between 50 per cent and 70 per cent of new businesses fail in the early years, the FCA says.

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”, the FCA explains.

The FCA is proposing that for non-advised clients, firms must assess appropriateness before allowing them to invest through a platform, using the same criteria as that being brought in for unregulated collective investment schemes.

In addition, it notes that while most platforms will simply be providing an introduction to an investment they “will need to think carefully” about whether supporting information such as a star rating or ‘investment of the week’ award amounts to advice.

If it does the firm will need to apply to FCA for permission to advise on investments, the FCA states.

The FCA says the changes are designed to make the investment-based crowdfunding market more accessible to retail clients while still aiming to ensure that only investors who can understand and bear the risks participate in the market.

Last year, the regulator issued a warning to investors warning that crowdfunding schemes are complex and high-risk and that higher returns from such investments are rare.

One such crowdfunding site, Abundance Generation, which is the first FCA-regulated platform in the sector, announced in August that investors had committed to more than £700,000 in just 35 days to fully fund the latest two renewable energy projects available. These projects included solar panels on schools and on new build housing.

The latest projects took the total amount raised to £3m since Abundance’s launch in summer 2012, with people investing as little as £5 per project. A further £7m of projects are planned for launch through the rest of 2103.

Simon Morris of international law firm CMS added: “Crowdfunding is the market’s response to banks’ under-lending and the FCA must be careful not to over-regulate this important source of alternate finance.

“Some protection is required and the FCA’s plans appear broadly proportionate.”

The consultation closes for responses on 19 December 2013.