New regulatory rules governing investment into ‘crowdfunding’ projects could effectively alienate the small-time investors the funding mechanism was designed to attract, the founder of Thecrowdfundingcentre has argued.
Barry James, who founded the website with aggregates information on crowdfunding and offers access to projects from a number of platforms, told FTAdviser the FCA’s tougher new rules will mean investors could have to fill out a multi-page form to make even the smallest donation.
The regulator today introduced tougher new rules for crowdfunding, saying that investors should not pour more than 10 per cent of their investable assets into crowdfunded projects unless they are sophisticated, high net worth, or clients of advisers.
The rules only cover either investment- or loans-based crowdfunding platforms, and do not relate to platforms or projects that seek donations, provide rewards rather than investment returns or that provide access to exempt investments such as enterprise zones.
However, Mr James argues that if investors are forced to fill out pages of paperwork to invest even sums under £100, it could become impossible to attract the small investors that form the backbone of projects and that could provide an alternative funding option for small businesses.
“The pattern is that it’s the family and friends who create the bedrock of interest and trust, and then quite often other investors will come in as well.”
“Before, I sit in front of a screen, get interested in a project I really like that I want to succeed, here’s fifty quid. I’m ticking a box saying I’m risking this money, I might not get it back.
“It’s nothing new that the more barriers there are the less likely people are to actually do it.”
Overall, reaction to the proposals was broadly positive both at proposal stage and at policy stage.
Ayan Mitra, chief executive officer of equity crowdfunding platform CrowdBnk, said: “This ensures crowdfunding remains available to all types of investor and, on the whole, we think the [FCA’s] approach strikes the right balance between consumer protection and access to investment opportunities.
“In an era where even established [small and medium-sized businesses] with strong track records are struggling to obtain funding from banks, crowdfunding provides an important alternative route to finance and makes it easier for all suitable investors to find and invest in quality businesses.”
Monica Gogna, partner in the financial regulation team at law firm Pinsent Masons, said: “It is interesting to note the FCA’s amended approach to capital requirements and also certain requirements on conduct of business for this new industry.
“It is a clear indicator that there is support to ensure that this industry is provided with an environment in which it has the potential to flourish whilst the regulator continues to be proportionate to any potential risks that such firms may hold.”