Why crowdfunding needs regulation

Why crowdfunding needs regulation

Both new regulation and education are needed in the crowdfunding space, according to peer to peer providers.

Luke Davis, founder and chief executive of IW Capital, told FTAdviser the flexibility of the UK’s equity crowdfunding model has been instrumental in the industry’s record growth, with the sector almost doubling since 2014, bringing in £146m during 2015 alone.

“As with any finance sector that displays such momentum, regulation must undeniably follow,” he pointed out, adding unlike the US market, the UK’s attitude towards alternative finance is explorative and relatively un-structured.

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“However our liberal approach could prove to be detrimental when assessing the long-term picture.”

Mr Davis said the confidence which early adopters have had in the crowdfunding industry has proven to be integral to its success, yet at times it has been reckless.

He said: “Those self-certifying themselves as sophisticated investors are doing so subjectively, meaning that investments are less informed and subsequently more frivolous.

“Combine this with a medley of online platforms that facilitate loosely governed ‘click-investments’ and the waters become choppy.”

He suggested that to mitigate this, “more than a legally worded splash screen on crowdfunding platforms” should be implemented, along with the gradual phasing out of self-accreditation.

If more platforms and industry bodies lobbied for the Financial Conduct Authority to back a certification process, Mr Davis said an infrastructure which protects the retail investor could be established according to their actual level of investment knowledge.

Julia Groves, a director at the UK Crowdfunding Association and managing director of the Trillion fund, stated the industry has a responsibility to both educate and protect every day investors from risks they do not understand.

She said: “Investor education is absolutely essential and we are exploring partnerships with established financial services companies to build a programme to help less experienced investors better understand risks and assess or even negotiate returns.

“It is all about the balance between investor protection and opportunity: forcing a high minimum investment cuts out the majority of retail investors and makes it harder to diversify by investing a smaller amount in a portfolio of businesses and so spreading the risk.”

She pointed out wealth is not a skill set and it does not follow that someone with £5,000 is less capable of assessing an investment opportunity than someone with £50,000.

Ms Groves said: “Risk is not a dirty word, there is no such thing as investment without risk, the goal here is not to stop people losing money, it is to make sure they understand the risks and can decide from themselves if it is priced accordingly.”

Jenny Tooth, chief executive of the UK Business Angels Association, said regulation is a tricky area and it is important to be careful with it.

She said: “Once you start to regulate the crowdfunding market, then you will also bring unnecessary regulation to the angel market.”