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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