Our Tech Funding Report, explored crowdfunding and the key factors that a business should bear in mind when considering crowdfunding as an alternative funding option.
Crowdfunding platforms are becoming an increasingly popular alternative to traditional funding streams, and in this article, we examine crowdfunding in further detail, and consider the regulatory and other potential issues that can arise with crowdfunding.
Types of Crowdfunding
Crowdfunding differs from other types of investment as it gives a business the ability to raise funds from a large number of people as opposed to one or a small syndicate of firms.
There are different types of crowdfunding models including loan-based (also known as peer-to-peer lending) which involves businesses or individuals raising finance by borrowing on fixed repayment and interest terms. Loan-based crowdfunding is usually made up of a large number of lenders making relatively small loans.
Another crowdfunding model is equity-based (also known as investment-based crowdfunding) which involves businesses offering investors a proportion of equity in exchange for those investors contributing funds. This type of crowdfunding is particularly attractive to start-ups and smaller businesses who might find it difficult to raise funds.
Reward-based crowdfunding (also known as pre-payment) involves a business offering the chance to subscribe for a reward, service or product giving the subscriber the opportunity to purchase a new product before it is launched.
Finally, donation-based crowdfunding involves, as suggested by its name, the raising of funds through donations, usually for a social cause.
Regulation of Crowdfunding
Rewards and donation-based crowdfunding do not involve any regulated activities and the investor will not share in any profit or financial returns. As such, those types of crowdfunding are not regulated and do not face the same issues as equity-based crowdfunding.
Firms operating crowdfunding platforms must comply with various regulatory requirements including potential FCA authorisation, and various provisions under the Financial Services and Markets Act 2000 and Companies Act 2006 regulate those types of activities.
Although FCA authorisation can provide benefits for an investor, including a course of complaint to the Financial Ombudsman Service and compensation from the Financial Services Compensation Scheme, obtaining the authorisation can take time and there are ongoing regulatory obligations. As such, there are exemptions that allow companies to market and sell the security to an investor without needing FCA authorisation.
For more information about crowdfunding please contact Mairead Platt or another member of the technology team.
If you haven't seen our North West Tech Funding report, this is available for download on our dedicated page on the Brabners website. We have also prepared a video around the report's findings which is available on our video hub.
