Edwin Coe Corporate Partner, Nick Williams comments on the fact that the emergence of crowdfunding over the last few years has been hailed as an internet generated revolution.  The term encompasses a range of activities, usually website based, whereby members of the public are asked to make a financial contribution to philanthropic, artistic and business related causes.  Among the latter, the concept has been taken up by companies and their advisers looking to raise funds by issuing shares (investment-based crowdfunding) and borrowing (loan-based crowdfunding).

Companies raising funds by offering their shares is not a novel concept, and in the early rush to embrace the investment-based crowdfunding revolution, some participants appeared to lose sight of the fact that they were operating in a heavily regulated environment.  The Financial Conduct Authority (FCA) in October 2013 released a consultation document to clarify and refine the regulatory position and to assert its authority over loan-based crowdfunding as well.

The FCA’s proposals reflect the higher risks for investors that crowdfunding involves, compared to more traditional investments and deposits.  The FCA confirms that a person operating an investment-based crowdfunding website or platform will be carrying on a regulated activity in the UK, if for example they are arranging deals in specified investments.  As a result, the website operator would have to be authorised by the FCA, or be the appointed representative of an authorised person.

In addition, the FCA is proposing from 2014 to restrict the direct offering of unlisted shares or debt securities by firms to one or more of the following types of client:

  •  retail clients who are certified or self-certify as sophisticated investors; or
  • retail clients who are certified as high net worth investors; or
  • retail clients who confirm that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person; or
  • retail clients who certify that they will not invest more than 10% of their net investable portfolio in unlisted shares or unlisted debt securities (i.e. excluding their primary residence, pensions and life cover).

The FCA also proposes that operating a loan-based crowdfunding platform will from 2014 be a regulated activity which requires the operator to be authorised by the FCA, subject to certain transitional provisions.  The FCA’s proposals will require firms to ensure that investors have the information they need to be able to make informed investment decisions and that all communications are fair, clear and not misleading.  In addition to this, to protect investor interests, the FCA are consulting on a set of core requirements for firms, including:  minimum prudential requirements to ensure their ongoing viability; steps firms should take to ensure existing loans continue to be managed in the event of platform failure; and rules that firms must follow when holding client money;

While crowdfunding websites provide a great forum for companies looking to raise funds, and also give investors the opportunity to invest in early stage companies that don’t have a listing, the FCA consultation provides further proof that the revolution remains subject to the existing regime.

The FCA’s consultation document can be found on its website at www.fca.org.uk . Comments are invited by 19 December 2013 using the online form provided.  The FCA have indicated that it will consider the feedback and publish its rules in a Policy Statement in February or March 2014.

If you would like any further information about this, please contact Nick Williams by emailing nick.williams@edwincoe.com 



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