The co-founder and joint managing director of Abundance Generation, a crowdfunding investment platform, said the regulator risked “oversimplifying matters badly” if it stipulated that only sophisticated investors who had received professional advice could be targeted by the industry.
His comments followed the publication of a 70-page consultation paper on the FCA’s regulatory approach to crowdfunding, and similar activities, which identified key risks in investment-based crowdfunding.
These included the likely failure of start-up businesses and crowdfunding platforms inadvertently giving unauthorised advice.
The regulator has suggested that certain investors confirm before a promotion is made that they would receive regulated investment advice or investment management services in relation to a crowdfunding product.
Those investors who do not receive advice may be subject to an “appropriateness” test to ensure they understand the full risks involved under the proposals published on 24 October.
Mr Davis said: “By creating a distinction between just two categories of crowdfunding – loan and investment – the FCA risks oversimplifying matters badly, with some models allowed lighter regulation when the underlying asset makes them riskier, and limiting the access of investors to other models where the risks inherent in the underlying assets are actually less.”
Industry reactions
Richard Brockbank, co-founder of crowd equity funding platform InvestingZone, said: “We do not agree that participation in equity crowdfunding, and the fantastic tax breaks that go with it, should be limited to high net-worth or sophisticated investors.”
Frank Cochran, managing director of West Midlands-based FSC Investments, said: “I will be telling clients who want this kind of advice to go away because it is simply not worth it. What happens if it all goes wrong? The investor will blame us and then the Fos will get involved.”
What Next?
The FCA will take over regulation of the consumer credit market from the Office of Fair Trading on 1 April 2014. The consultation paper proposed a “transitional” period where firms can absorb the changes up to 1 October next year.
