FCA sets sights on crowdfunding regulation

Crowdfunding, an increasingly popular form of financing for individual projects and small businesses, is set to be tackled by the Financial Conduct Authority (FCA), in an effort to cut some of the risks involved.

The method, which typically involves a business pitching an idea through an online platform, has also proved popular with investors looking to grow their savings.

Investors can then add small contributions, allowing them to spread the risk involved, and usually receive shares in return for their cash injection. This funding method enables small businesses that may otherwise have been turned down by banks to receive the external finance needed to invest and grow.

Individual projects, many of which have clear social or environmental objectives, also use websites such as Kickstarter, Sponsume and Buzzbnk to raise much-needed cash, often offering a range diverse rewards in return for financial contributions.

According to the Sunday Times, the FCA is said to be worried that investors are using crowdfunding platforms without being fully aware of the risks. Currently, the regulatory body has approved some platforms whilst others operate without approval.

The FCA said, “We believe most crowdfunding should be targeted at investors who how to value a start-up business, and who appreciate the risks involved and that they could lose all their money.

“We want it to be clear to investors in the majority of crowdfunds have little of no protection if the business or project fails.”

The FCA’s move to crackdown on crowdfunding sites may mean businesses will begin to find it increasingly difficult to successfully receive financial backing through such means, and alternative options may be more fruitful.

If a business decides that crowdfunding is a suitable finance option for them they should carefully select the platform. A platform that has the FCA’s approval is more likely to attract investors and as a result maximise the business’ chances of reaching its funding target.

Whether the FCA’s move will improve or negatively impact on the market remains to be seen.

Further reading:

August’s top 10 green crowdfunding projects

Abundance Generation: crowdfunding the future of energy

Capitalism 2.0 in the advent of the growing income gap

Solar crowdfunding campaign smashes target in 24 hours

The wisdom (and cash) of crowds: an introduction to crowdfunding