Sites such as KickStarter, Crowdcube and Seedrs, which allow individuals to back small businesses through stakes of as little as £10 which are gaining popularity as investors seek alternatives to volatile markets and low interest rates, and fledgling businesses hit by banks’ refusal to take on risky loans solicit other investors should be properly regulated in the same way that Angel Investment companies like Angels Den and Envestors are.
Some of these crowdfunding companies may not be properly safeguarding investors’ money, the Financial Services Authority (FSA) said. “Many crowdfunding opportunities are high risk and complex,” they added in an article posted on their website.
“We believe most crowdfunding should be targeted at sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money.”
Many banks have reined in their lending to comply with new rules compelling them to hold more capital and invest safely in the wake of the financial crisis. With small firms consequently struggling to find financing, a string of alternative funding models have cropped up.
But start-ups can take a long time to generate a return and investors can’t easily sell on their shares, meaning that their funds could be locked up for a long time, the FSA warned.
A high proportion of new businesses fail, meaning there is also a risk people lose their money completely, it pointed out.
While alternative sources of funding also involve risk – such as “peer-to-peer” lending, where members of the public can loan money to a firm – the parameters here are more clear cut, with the funds lent for fixed time period and investors having the option to access their money at any point by selling early.
Others, such as invoice financing which allows investors to boost a company’s cash flow by buying its invoices for a fee, are often only accessible to sophisticated investors.
Fraud is also a potential problem, the FSA warned. Only one crowdfunding website, Seedrs, which launched last month, is currently authorised and regulated by the FSA.
None of the other sites are covered by the Financial Services Compensation Scheme, which covers deposits up to £85,000 if a regulated financial institution collapses, or by the Financial Ombudsman Service, which helps settle disputes.
