New regulator aims to boost confidence in crowdfunding

The UK Crowdfunding Association will provide a code of practice and operating standards for 12 founder members.

Crowdfunding sees online platforms allow small firms and start-ups to raise capital from a many small investors, either by selling an equity stake, or in return for “rewards” and discounts related to a product or service.

Julia Groves, chair of the new body, said: “This is the sector pulling its socks up. In the context of other forms of lending failing to deliver for small businesses, this sector needs to mature.”

She admitted the sector, which raised just £11m for small businesses in the UK last year, is at a “very early stage”, but she added it is “poised for a lot of growth”.

UKCFA members must allow customers a cooling-off period after an investment is made, keep investors’ money separate, meet minimum IT standards and agree to publish customer complaints. The body is also aiming to lobby policymakers to establish a “proportionate” legislative framework to cover the activity of crowdfunding firms.

The Financial Services Authority has warned that crowdfunding should only “be targeted at sophisticated investors who know how to value a start-up business, understand the risks involved and that investors could lose all of their money”. It also said that investors’ shares will be difficult to sell, will produce few dividends and that investments will be diluted when more shares are issued, reports The Telegraph.

However, Ms Groves argued that crowdfunding is suitable for ordinary retail investors provided the risks are made clear and controls are in place.

“There’s a hint of democratic finance to this. It’s opening up an asset class to a group of people who it was previously closed to.
“Opening it up to everyone is a good thing if it’s done in the right way and this code will help deliver that,” she added.