Crowd-funding Clamp Down Could Affect Start-Ups

Posted on 2nd December 2013

Critics have warned that plans to regulate crowd-funding could deprive thousands of small firms looking for finance of a crucial source of income, as the rules intended to protect small investors strike the wrong balance on key issues and threaten the growth of the practice.

The Financial Conduct Authority (FCA) has come up with new rules after many small investors lost all their savings in fledgling businesses that failed to take off.

The regulator is concerned that firms offering peer-to-peer lending, also known as P2P, are targeting people reliant on cash savings who might take “inappropriate levels of risk”. It is also worried about advertising used to attract “young, inexperienced” investors into what can sometimes be unsafe arrangements.

However, MPs and others are warning that many new firms have nowhere else to go for cash and point to the many success stories over recent years. Only last week crowd-funding start-up Seedrs raised a £1m cash injection in a single day using its own platform, which it will use as working capital as it grows.

Crowd-funding has mushroomed in popularity as savers, who are earning little or no interest from High Street banks and building societies gamble their money on riskier alternatives promising higher returns.

The idea is that a crowd of savers and investors each give £10 to £10,000, or more, to an individual or entrepreneur who needs to borrow cash to invest in their business, which is usually a start-up. If enough cash is raised from this ‘crowd’, the investor is given a share in the business.

The FCA’s regulatory approach has been outlined in a paper and feedback will be provided by 19 December. The new rules will then be finalised and drawn up next April, with enforcement by the regulator beginning in October 2014.

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