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Crowdfunding Regulation

Crowdfunding Regulation

Crowdfunding is transforming the way businesses raise capital.  As an increasingly popular alternative method of raising finance and with more and more websites offering contrasting versions of the crowdfunding concept, this page discusses the regulation applicable to this new and pioneering industry and the potential regulatory changes on the horizon.

How does crowdfunding work?

Crowdfunding usually takes place on online platforms that allow businesses or individuals seeking finance to pitch in support of their project or venture with the aim of attracting loans, contributions, donations and investments.

The traditional definition of crowdfunding is expanding as online platforms innovate to create alternative methods of fundraising. Crowdfunding can however broadly be split into four main categories of online investment vehicles:

  • Donation-based: this may involve people giving money to enterprises or organisations whose activities or purchases they want to support, with no expectation of any return on their investment. Donation based fundraising is most commonly used in the context of social and ethical based projects that would traditionally attract philanthropy-giving.
  • Pre-payment or rewards-based: people giving to receive a reward, service or product (such as tickets for an event, an innovative product, a download of a book or new computer game).
  • Loan-based: or peer-to-peer lending (P2P lending), this is where individuals lend to businesses or other individuals in exchange for interest payments and capital repayment over time.
  • Investment-based: people investing directly or indirectly in new or established businesses by buying shares, debt securities or units in an investment scheme.

Through a variety of online investment vehicles, a snapshot of which are illustrated above, crowdfunding provides non-traditional investors access to investment opportunities and equally provides start-ups and SMEs with access to previously untapped avenues of funding.

Is crowdfunding regulated?

Today, the Financial Conduct Authority (FCA) regulates equity and loan-based crowdfunding under the Financial Services and Markets Act 2000. Donation and reward-based crowdfunding platforms are spared from the regulatory regime imposed by the FCA as they do not offer the same equity stakes or return as peer-to-peer lending or investment-based crowdfunding and as such nor do they carry with them the same risks.

  • Loan-based: under the auspices of the Financial Services and Markets Act 2000, loan-based crowdfunding became regulated as the “activity of operating an electronic system in relation to lending”. Online platforms facilitating loan-based crowdfunding between individuals or businesses will be deemed to be carrying out a regulated activity and will, therefore, require FCA authorisation. The FCA rules require regulated platforms in order to comply with consumer protections concerning clear disclose of information and the protection of consumer funds. This type of regulation is designed to address some of the risks and potential asymmetry of information investors face when using crowdfunding platforms.
  • Investment-based: The FCA regards this from of crowdfunding as high-risk, with the potential for capital losses. This is likely to be because the instruments traded on investment-based crowdfunding platforms are not listed on regulated stock markets and are instead traded online without the same degree of oversight as other financial institutions offer. An investor will have no access to compensation in the event that the start-up or business becomes insolvent. Online platforms facilitating investment-based crowdfunding will in most circumstances be deemed to be carrying on a regulated activity and will therefore require FCA authorisation.

Anticipated developments in regulation

The European Commission has recently commented on the regulation of the crowdfunding industry. The Commission noted that at present 11 EU countries, including the UK, have developed bespoke rules on crowdfunding at a national level. The Commission highlighted the lack of harmonisation of regulatory frameworks across member states and commented that crowdfunding platforms struggle to operate on a cross-EU basis as a result of the compliance and operational costs involved in observing divergent national rules.

In response to this, the European Commission has recently published a draft regulation on European crowdfunding. The draft regulation proposes requirements for crowdfunding platforms to act in the best interests of clients, to establish complaints handling mechanisms and improved awareness and mitigation of conflicts of interest. The Commission has stated that investment-based lending or loan-based crowdfunding activities would benefit from a sound and proportionate EU regulatory framework.

This proposed EU framework for crowdfunding regulation will offer a comprehensive regime for those market players who decide to operate as European crowdfunding service providers. It is hoped that this framework will provide incentives for crowdfunding service providers to scale-up while ensuring sufficient protection for investors and project owners. The implications of Brexit on the crowdfunding industry remains uncertain, the FCA may choose to pursue a programme of harmonisation with our European neighbours or alternatively create a regulatory regime bespoke to the UK.

The coming months and the anticipated developments of the current regulatory framework pursued after Brexit will determine the future position of crowdfunding in the UK. For advice navigating the present turbulent and unpredictable political and regulatory climate, contact Selachii for commercially-focused and pragmatic legal advice.

How can Selachii help?

Compliance with the legal framework underpinning the crowdfunding industry can appear daunting. With the uncertainty of Brexit and a review of existing UK regulation anticipated, we can provide clarity and support. Whether you are thinking of investing, borrowing or creating a crowdfunding platform, contact our highly experienced fintech lawyers for legal and commercial advice.

We offer the same level of experience and expertise as you would expect to find at a large city law firm, with state-of-the-art case management technology. We take the time to get to know our clients and treat them as individuals. We will assist you with every aspect of regulatory compliance, from updating current practices, understanding your legal requirements as a crowdfunding service provider, to entering the crowdfunding industry as a start-up or potential investor. Our team of expert Fintech solicitors are on hand to provide practical and bespoke advice. We are specialists in what we do, and that specialism has been born out of our tenacious and entrepreneurial approach.   

Contact our Crowdfunding Solicitors London, Today

At Selachii, we have a wealth of knowledge and experience in assisting platform providers access this emerging market and understand current trends and anticipated developments in the regulatory regime. We provide forward looking legal advice specific to your business needs and will be on hand to provide pragmatic and holistic solutions to the challenges faced by your business. Our team will help ensure your ongoing compliance with crowdfunding regulations and keep you up-to-date on upcoming changes and opportunities in this industry. 

Contact a fintech lawyer at Selachii today for expert legal advice on crowdfunding in the UK and Europe. Call us on the number below or complete our contact form to arrange a consultation.

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