Out-Law News 2 min. read

FSA's 'softening stance' towards crowdfunding platforms good news for businesses, says expert


Businesses stand to benefit from the "softening stance" the UK's financial services regulator is adopting towards 'crowdfunding' platforms, an expert has said.

Earlier this month Crowdcube became the first equity crowdfunding platform to gain regulatory approval from the Financial Services Authority. Crowdcube is a forum that allows businesses to advertise projects they are seeking financial support for and, in return, give investors a share in the equity they own.

Online funding platforms use a range of methods to facilitate access to finance for small businesses and to fund specific creative projects. Methods include crowdfunding, where individuals contribute towards a particular project in return for specified rewards; crowd-investing, which enables investments in shares and other instruments; and peer-to-peer lending, used to facilitate simple loans.

Corporate law specialist Jennifer Malcolm of Pinsent Masons, the law firm behind Out-Law.com, said that the FSA's regulatory approval of Crowdcube would inspire greater confidence amongst crowdfunding investors and have a knock-on benefit for businesses seeking access to finance.

"The FSA's authorisation of Crowdcube should be a welcome green light for crowdfunding investors," Malcolm said. "On one hand investors can now make direct equity investments into new businesses via Crowdcube's website and on the other hand investors can take greater comfort that their investments are subject to adequate regulation and protection.  This should lead to greater investor confidence in this innovative and important new source of funding for businesses."

"For companies seeking to raise money through crowdfunding, the FSA's softening stance and potential for increased investor confidence should allow companies to tap into a new source of funding and may help plug the funding gap between their requirements and the funds available from banks and angel groups," she added.

Crowdcube said that it had first applied for FSA authorisation in 2011 and that in obtaining the regulator's approval, investors in businesses through its platform would be able to claim compensation from the Financial Services Compensation Scheme and make complaints to the Financial Ombudsman Service if their investments were not handled properly.

"Our authorisation and the additional investor protection it affords will increase satisfaction and confidence, which is at the heart of our business and will be crucial to our long term success in the UK," Darren Westlake, co-founder and chief executive of Crowdcube said in a statement.

The FSA's approval of Crowdcube was also welcomed by Government enterprise adviser Lord Young.

"Crowdfunding is a highly innovative and important source of finance for UK businesses," Lord Young said. "I am delighted to see that the UK financial services industry and its regulators are reacting dynamically to new models of business finance, such as equity crowdfunding, so that the UK can maintain its position as world leaders in this space."

Malcolm said that crowdfunding is "gaining momentum in the UK" and that it is particularly growing in popularity in areas where businesses are seeking to "raise seed capital for niche, creative projects such as music and film". She said, though, that crowdfunding is still "some way from competing on the same level as traditional sources of funding such as private equity funding, bank debt and business angel investment".

"Whilst crowdfunding will not replace established funding methods, it is backed by high profile supporters such as Sir Richard Branson and Lord Young, and will be a trend to watch in 2013," Malcolm added.

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