The UK financial regulator is to put the phenomenon of “crowdfunding” under the spotlight, setting out rules designed, it says, to give investors clearer information about what they are investing in and prevent abuses.

The UK financial regulator is to put the phenomenon of “crowdfunding” under the spotlight, setting out rules designed, it says, to give investors clearer information about what they are investing in and prevent abuses.

The [tag|Financial Conduct Authority|]Financial Conduct Authority[/tag] is setting out new rules that relate to peer-to-peer lending and equity investment-based funding that it says “need regulatory oversight”.

Such sources of financing for new businesses or small, existing firms have emerged as ways for entrepreneurs to obtain money when traditional sources of finance, such as bank loans, have dried up in the recent difficult economic climate.

The term “crowdfunding” relates to how networks of individuals, usually using internet-powered connections, pool resources to support business and other projects. Among the organisations in this space are GoFundMe, InvestingZone and Angels Den; in the US, the Kickstarter network is an example.

The UK financial watchdog feels that the time has come to put such networks under the microscope to prevent potential abuses.

“Consumers need to be clear on what they’re getting into and what the risks of crowdfunding are. Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding,” Christopher Wooard, FCA director of policy, risk and research, said in a statement.

Richard Brockbank, co-founder of InvestingZone, a crowd-funding platform, said of the FCA proposals: “InvestingZone is an appointed representative of E-Synergy Limited, an FCA-regulated venture capital fund manager and the team have experience in early-stage venture capital. The company has gone to great efforts to make sure that the risks inherent in early stage investments are clearly presented on its platform and that only investors who understand those risks are admitted."

"We would welcome FCA regulation to standardise the way this is done across other platforms and to help give investors confidence in this newly accessible asset class.  We do not agree that participation in equity crowdfunding, and the fantastic tax breaks that go with it, should be limited to high net worth or sophisticated investors. A concern is the number of companies entering what is essentially a professional financial sector without sufficient experience and others sites have very lax investor registration processes.  Whist we encourage investors to carry out a certain level of due diligence, it is still the responsibility of the platform investment executives to ensure that all listings are sensible and only investors who understand the risks are admitted," he continued.

"With regards to [FCA proposals] limiting the amount that can be invested, we feel that this could be patronising to investors who can demonstrate that they know what they're doing but just don't happen to be rich," he added.

Details

The FCA said that consumers willing to lend money to companies through peer-to-peer crowdfunding websites will receive explanations of the key features of the loans as standard. They will also get an assessment of the creditworthiness of borrowers before granting credit, and crowdfunding sites, or platforms, will need plans in place to ensure loan repayments continue even if a crowdfunding company collapses.

The regulator said that 14-day “cooling off” period will allow both borrower and lender to withdraw without penalty from the agreement if either changes their mind. New prudential requirements will also be phased in, it said.