Last week, the White House passed a law designed to easecrowdfundingfor start-ups and smallbusinesses. The JOBS Act – which, as the name suggests, is designed to boost business growth andcreate jobs – loosened securities regulation to increase the number of shareholders a firm may have;removed restrictions on small businesses advertising for investors; and raised the cap on the sumordinary individuals can invest in an enterprise.In doing so, it modernised US law to accept crowdfunding and other online fundraisers as acontemporary route to finance. This pioneering move also ensured that the necessary regulation is inplace for the sector to thrive, and win the trust of citizen investors. So, would the UK's online investmentcommunity benefit from similar legislation?
Why do we need regulation?
One of the most exciting aspects of the crowdfunding movement is that it is largely uncharteredterritory, ungoverned by traditional legislation and red tape. However, that is as risky as it is excitingand, to win the faith (and the funds) of investors long-term, greater structure may be required – toreassure investors that they won't get their fingers burned.Unfortunately the spotlight is on start-ups here, as there is some concern that fraudulent"entrepreneurs" could start using these platforms to con unsophisticated investors out of their savings.The power of the press is such that just a couple of unfortunate incidents could significantly derailprogress in the sector – and that's bad news for everyone.If investors don't believe their money will be used wisely, they won't invest. After all, who wants toinvest – or indeed publish a pitch – on a platform where no-one is meeting their funding targets? LukeLang, co-founder of Crowdcube, argues that by introducing legislation which – at the very least – makesinvestors "fully aware of the risks involved when investing in early stage businesses", investors can makewiser investments and standards in the sector can be maintained.
What regulation exists already?
According to theBritish Business Angels Association(BBAA), only two UK angel networks are currentlyregulated by the Financial Services Authority (FSA) – Beers and Partners and Braveheart incorporatingEnvestors, both of which have commercial interests. The remainder use the Financial Services andMarkets Act (FSMA) to certify their angels as sophisticated or high-net-worth investors.Jenny Tooth, business development director of the BBAA, believes this is appropriate."The angelnetwork’s purpose is to be an honest broker in the middle between investors and investees. Theyshouldn't be promoting deals or including judgement – although, if they are, it needs to be regulated."She adds: "Crowdfunding and similar open platforms are less sophisticated so need more guidance. Thisis a very fast-moving environment, making it confusing for entrepreneurs. “However, FSA legislation is not necessarily the right method, as it can be difficult and expensive tocomply with. The smaller angel networks simply wouldn't be able to operate if they were FSA-regulated."
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Indeed, the BBAA is currently spearheading a campaign for the Treasury and HMRC to re-examine theFSA and carve out less-severe regulation, which would be more appropriate for crowdfunding – and,potentially, online angel networks.
What might the new regulation look like?
Crowdcube is also engaged with the UK government. The founders have been providing input for theRedTape Challenge, to reduce barriers to crowdfunding and facilitate application of financial initiatives,including theSeed Enterprise Investment Scheme(SEIS), to platforms such as its own.However, Lang adds that he would further like Cameron to place an exemption on the requirement forbusinesses raising less than €5m to gain authorised financial promotion – meaning UK start-ups couldadvertise for investors, as EU firms can, without having to produce a costly investment prospectus. “We’d like to see a lighter regulatory regime, which would encourage a crowdfunding-for-equity marketto be quickly established,” he says. “That would give rapid growth in the levels of investment in earlystage businesses.” While this idea complements the ethos of the Challenge, there is a risk that some other actions couldincrease red tape. “There is a need for a regulated framework to protect individuals who put their moneyinto these platforms – but without deterring people who wish to support projects,” Tooth explains.Sue Acton, founder of Bubble & Balm, the first business to successfully raise finance through anequity-based crowdfunding platform (Crowdcube) agrees: "I think clearer guidelines would be good, toprotect and inform both investors, as to the risks, and investees, as to their rights and responsibilities."Equally though, the beauty of crowdfunding is that it's about 'the man on the street' investor and aboutstart-up businesses who may have no track record or credit rating. The greater the regulation thegreater the risk of excluding the very people for whom crowdfunding is a great idea."One concern BBAA has, which Tooth claims would need to be addressed in any forthcoming legislation, ishow businesses that were originally funded by crowdfunding can then receive angel investment. “There could be challenges where more than a hundred individuals have a piece of the business and thenthe company seeks angel investment. What would the relationship between angel investors and theseindividuals be? “We need to develop a framework and set of rules that are relevant to these new developments – bothonline angel platforms and crowdfunding. I am not saying that the FSA is the wrong body [for this job]but that the costs of meeting compliance requirements are very expensive and these costs get passedonto the entrepreneur.” She adds: “One thing they have introduced in the US, which is very sensible, is a cap on investment[which would stop online investments from becoming immeasurable]. Perhaps we wouldn’t choose toadopt the same cap over here but it would certainly be a start.” Yet, the international pioneers of the crowdfunding movement are not waiting around for theirgovernments to act. They have already established a Crowdfunding Accreditation for Platform Standards(CAPS) program, to authorise legitimate crowdfunding platforms and foster the sustainable growth of theindustry. “Crowdcube is a founding council member of CAPS,” says Lang. “The organisation is designed to protectboth people pledging or investing capital and people raising capital, by implementing a set of operationalstandards which crowdfunding platforms should achieve.” Both the BBAA and Crowdcube are also founding members of theNext Generation Finance Consortium,which seeks to break down this brave new world of alternative finance to entrepreneurs – frompeer-to-peer lending to invoice factoring and angel investing. As Tooth identifies: “Transparency is the core requirement for both the entrepreneur and investors. What are the costs forthe entrepreneur engaging in crowdfunding and the ongoing relationship for the individual putting moneyin? “It is vital that a clear framework of information is developed and statistics of outcomes are gathered.This would also give comfort to angel investors when seeking to invest alongside crowdfunded deals.”
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Crowdfunding debate: What can the UK learn from Obama’s JOBS Act?
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