As crowdfunding picks up speed the FCA want to impose new rules….
FCA crowdfunding policy review, the FCA fears that some of the p2p loan-based models are becoming too complex, and I must admit I have to agree.!
However, before we get started I want to start by asking you a question. Why do you think investors want to get involved in crowdfunding investing in the first place? …
Well crowdfunding allows people just like you and me to take ownership in startups, growing businesses, innovative ideas or assets like property.
In the past investing was only for the rich and wealthy
However, today with crowdfunding entrepreneurs can now seek investment from people who care about what they have to offer. Whether that be a startup business, an innovative new product or property development of long term assets. Investors can base their decisions to invest,based on the company and its dream project.
At last through crowdfunding business owners have an alternative way in which they can raise capital. Crowdfunding is something different and for many companies its better than venture capital or angel investors.
The new investor
Crowdfunding allows a new investor to be part of something that in the past would not have been possible.
One thing that the FCA crowdfunding policy review is starting the realise is that this new breed of investor need educating. They need training on how investments work and why there are risks associated with any type of investment.
You only have to search on the internet for ‘crowdfunding investment training’ to draw a blank.
If you have found an online training course which I am not aware of which is specific to crowdfunding investing. All I ask is could you please send me an email to firstname.lastname@example.org. with a link to the course.
I would then be happy to promote it to my network.
This is one of the main reasons why we need crowdfunding platforms to invest in their technology to allow entrepreneurs to present all the facts. Discussions with investors indicate platforms are too rigid and do not allow for any interaction or communication.
As crowdfunding gains more momentum, platforms need to consider enhancing their offering. I suggest adding live Q&As sessions during the fundraising process. This could be via live streams or webinars, this would give potential investors the chance to ask questions.
I also think for the non-asset-based business a business plan should be available for any investors to review.
I understand that some entreprenrus will be worried about confidentiality, but to be quite blunt crowdfunding is a public way of raising money. So with that said if this is your worry maybe it’s not the right fundraising strategy for you.
Investors should be comfortable with the long term business strategy and the numbers before they make an investment.
I think it’s the platforms responsibility to ensure entrepreneurs seeking financial investment provide as much information as possible.
Platforms need to develop their platforms to ensure value is delivered to both the entrepreneur and investors alike. The more interactive the crowdfunding platform becomes the more transparent the opportunity ensuring investors receive clear and accurate information before making an investment decision.
Not all crowdfunding platforms are the same
Over the last few years there has been a surge in crowdfunding platforms however, the models they operate are not the same.
Its easy to see why people get confused when the term Crowdfunding is used as a generic term to lump everything under one roof.
So, for the article I am going to use crowdfunding to refer to two types of finance which include equity crowdfunding and rewards-based crowdfunding. Then I will share with you how peer to peer lending is different.
Rewards based crowdfunding
Its just as it says on the tin, the business offers a reward in exchange for funding. For example, you can check out this great rewards-based project for the aluminium straw
Rewards based crowdfunding allows great ideas to come to life. They can also help solve growing problems in the world.
For example this is a recent announcement in the UK
- Plastic straws and cotton buds could be banned in England as part of the government’s bid to cut plastic waste.
- Ministers pointed to one estimate that 8.5bn plastic straws were thrown away in the UK every year.
- The prime minister said plastic waste was “one of the greatest environmental challenges facing the world”.
Crowdfunding sites like Kick booster and Kickstarter give everyday individuals the opportunity to get behind an idea that they want to support.
So, in this situation anyone who gives their money to a company who they want to support are investing in the idea and concept. However, there is one main thing to realise they are not doing it for financial gain and they do not stand to gain or lose money in doing so.
You maybe a young business or you may have a great idea. However you may need to raise money to grow your business. If you decide to seek equity investment through crowdfunding. Noteworthy, anyone who decides to invest in your business will receive in return a stake of the business in the form of a share.
As any entrepreneur understands when you are starting or growing a business it could go two ways. The business can fail, and you will lose everything you have invested into the business. Alternatively, it could prosper and grow beyond your expectations.
If you are an investor and decide to invest in a business through equity crowdfunding. You will share the same risks as the entrepreneur, if the businesses fails you will also lose your money as your shares will simply be worth nothing. However, if the business prospers you will share in its success and in some cases as an investor you could be in line for a tidy return on your investment.
One thing you should also consider before investing is a startup, growing business or innovative idea. While in theory you can sell share’s, it may be more difficult in an early stage business which is subject to volatility.
So why is Peer to peer lending different?
The three main reasons why p2p lending is different:
- With peer to peer lending you do not own a stake in the business.
- You do not own any shares.
- You are just providing a loan to a person or business in return for capital and interest repayments over an agreed term.
One thing you need to be clear about is a loan is very different to an equity stake in a business.
In theory the risks and rewards are more modest with one of our partner p2p lending platforms stating it has facilitated £1.4 billion in loans with none of its investors every losing a penny.
With peer to peer lending platforms they can be more targeted, and some will just specialise in a certain niche. They can choose to just lend to certain types of borrowers. For example, individuals, businesses or property businesses.
Once you start looking you will find many permutations of the models outlined above each with its own strengths and weaknesses.
FCA Crowdfunding Policy Review
After reading the FCA crowdfunding policy review proposal I want to take this chance to air my personal thoughts and suggestions on the subject.
You will note from my details above there are clear differences between rewards based crowdfunding, equity-based crowdfunding and peer to peer lending.
Separate the use of the term crowdfunding from peer to peer lenders. You will already see that peer to peer lending platforms are keen to explain to visitors why they are different. You will see Ratesetter writing a full article on why they are different.
Even in the FCA Crowdfunding proposals its clearly shows the confusion when it refers to the structure review
While there are some commonalities between P2P lending and investment-based crowdfunding, there are also significant differences between the two.
*Extract from FCA crowdfunding policy review
The FCA crowdfunding policy review states crowdfunding is an important alternative source of finance for individual and business owners alike. It also provides investors with an alternative investment opportunity. It then goes on to say investment through crowdfunding is not without risk because of the complexity of the investment offered.
I want to point out that I think education is required not more red tape. Crowdfunding is still in its early days and if we want to remain innovative and stay inline with our American partners we need to educate.
I propose that platforms come together to form an online education platform. This platform could provide the training and education the new investor needs.
If you think this could be something as a platform you would be interesting in exploring. I would suggest contacting NESTA.
Nesta – Back new ideas to help governments reform public services and improve citizen engagement through smarter use of people, data and technology.
Innovation funds are available, crowdfunding has just started to grab the attention of entrepreneurs and we still have a way to go before we can truly understand the future potential it can provide.
Much of the report concerns p2p lending platforms and some good points have been raised which include platforms not providing full information when it comes to:
- The investment information
- Pricing structures
- The platforms procedure should it have to wind down its operation
Since the proposal I have quickly seen platforms adding wind down procedures, however, still feel their is more work to be done for P2P lenders on pricing.
Personally, I have found it very difficult to find platforms that have provided a break down of the full costs involved. For both the investors and borrowers, platforms need to provide detailed case studies showing the full cost breakdowns.
- For borrowers case studies need to also include any ancillary fees for late payments.
- For investors, case studies need to include fees for set up costs, returns and what it would look like if they exited the loan early.
Platforms need to provide detailed case studies showing clear costs for setup, management and sale of shares. These need to be easy accessible on the platform and not hidden behind sign up forms.
Provision fund buffers
If you are not already familiar with the term fund buffer, the Provision Fund reimburses investors if a borrower misses a payment. Platforms aim to manage the size of the Provision Fund so that it covers all expected future loan defaults.
However, most of the platforms provide little information.
An investor’s guide to the platforms provision fund buffers. This needs to provide information on :
- What is a provision fund buffer
- How it works with examples
- Who owns the fund
- How are the funds used by the platform.
- What happens to any interest paid on the fund.
- Who owns the fund
- Who does the money belong to?
I also suggest this is made readily available on the platform for anyone to download freely without having to register their details.
Many of the peer to peer lending sites provide customers with an anonymous service. However, currently Investors need to be made aware before investing that they will or will not have contact with the persons or businesses receiving the investments.
Just before we go any further !
I need to ask you why do you think this is important with peer to peer lending?
The answer is because, in the context of a P2P loan, the investor is exposed to the underlying credit risk of the borrower. Thus, has a direct relationship with them under a loan contract. This means that they bear the risk should the loan not be repaid. Not the P2P platform
Any persons, businesses or investors involved in peer to peer lending should be prepared to provide information and personal details.