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Crowdfunding and other alternative financing on the rise as new figures show £1bn raised in 2013

The financial services regulators' approach to oversight of the rapidly growing crowdfunding and peer to peer lending markets must "strike a balance" between protecting investors and enabling the sector to grow, according to 'innovation charity' Nesta.17 Dec 2013

The group's comprehensive study of the 'alternative finance' market (14-page / 185KB PDF) showed that the value of funding provided through crowdfunding, peer to peer and invoice trading platforms almost doubled in 2012 and again in 2013. The research, carried out in conjunction with the Universities of Cambridge and California, Berkeley, found that intermediaries operating in the sector raised almost £1 billion this year.

"The data proves that our sector is increasingly moving from 'alternative finance' to mainstream 'modern finance," said Julia Groves, chair of industry body UKCFA.

"Crowdfunding is already providing real value in the provision of desperately needed capital in the engine room of the UK economy. With growing awareness and the advent of a new regulatory framework early next year the future looks extremely bright and the sector is primed to go on and completely replace aspects of retail banking," she said.

The Financial Conduct Authority (FCA) plans to begin regulating firms that operate loan-based crowdfunding platforms from April next year, and has also proposed reforms to its existing regulatory approach to investment-based crowdfunding. A consultation on its proposals closes on 19 December.

Crowdfunding is a mechanism to which some businesses turn to raise capital. There are a number of online funding platforms that link those businesses with individuals or groups willing to invest in their project. In return for that investment, individuals are generally offered rewards such as a share in the profits of projects or a stake in the business. Another form of crowdfunding involves peer-to-peer lending, including simple loan agreements between two or more parties.

Investment-based crowdfunding is already a regulated activity, but the FCA's consultation proposes new rules for that market as well as the introduction of a "lighter touch" regulatory regime for lower-risk loan-based crowdfunding activities. Its proposals include deeming operators of loan-based crowdfunding platforms to be 'trustees' of clients' or borrowers' money, and a new requirement for them to hold in place a cash reserve or proportion of loaned funds to protect themselves against financial difficulties.

According to Nesta's research, £939 million was raised through alternative finance intermediaries in 2013. Citing 91% year on year growth in the value of the sector since 2011, it predicted that the market would grow to £1.6bn by 2014 of which £840m would be used to provide business finance to start-ups and small and medium-sized enterprises (SMEs).

The survey found that over 5,000 start-ups and SMEs accessed the alternative finance market between 2011 and 2013 and obtained £463m worth of early-stage, growth and working capital. The survey captured more than 95% of all UK-based online alternative financing activities, including transactions carried out by almost all members of the UK Crowdfunding Association (UKCFA) and Peer to Peer Finance Association (P2PFA), Nesta said.

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