Although not a new concept by any means, Crowdfunding is something that people are only just starting to see as a credible means of investing and raising investment. With the popularity and success of sites like Kickstarter (where you can pitch a concept/creative idea for small investment), it’s becoming apparent that it can actually work rather than remain an idea in the minds of the dreamers. The concept is simply to sell very small equity stakes in a new company in exchange for micro-investment.
The problem comes when you advertise to non-professional investors. If for example you were to advertise in a national newspaper or advertise to ‘consumers’ online that you were offering small equity stakes in a new company in exchange for say £1,000, that would potentially be illegal under FSA rules – because you would be promoting the offer to the general public, who are not considered to be experienced investors.
It is still questionable as to what would happen should somebody successfully raise capital in this way and then lose the investor’s money. Would the FSA and FSCS (Financial Services Compensation Scheme) step in to protect people who had lost money? Or would the financing actually be declared illegal before it even had a chance to go ahead, meaning that investors are not protected? These are questions that even many financial lawyers are not clear on and it is seen as a grey area in English law.
You might be wondering what the big deal is here, why do we need crowdfunding anyway? You may well be thinking that it’s a good job that the FSA are protecting the general public from unscrupulous investment practices. The potential though is for ordinary people to benefit from investing in the same way that venture capitalists do, but without having to invest large amounts of money. After all, what return have ordinary people been getting recently on their investments or from their deposits?
Because crowdfunding is currently used predominantly for creative projects rather than equity based investment, it is not a viable option for the entrepreneur or startup business requiring larger amounts of money. One major problem with promoting a business through crowdfunding websites/organisations is that you have to put your idea out in the open before you’ve had a chance to set it up, leaving yourself very open to idea stealing, which is the last thing an entrepreneur needs. Apart from this issue though, given the choice many entrepreneurs would be quite happy to sell their business to the general public, bypassing banks and traditional investors (neither are particularly popular in the public eye). I think there are many people out there who would quite like this idea of an alternative stock market where they can invest small amounts of money into interesting projects/businesses. In the long term, if a model that works can be realised it’s the only real way that the public can benefit directly from the growth and profit of the next big businesses – isn’t that actually what capitalism is all about?
So it’s clear the concept has a long way to go, but there is progress being made. Kickstarter has so far raised tens of millions of dollars in financing for creative projects, which is surely a good sign. More surprisingly though, Obama passed a new bill recently that allows companies to raise up to $10,000 each from individual investors via the internet, without having to notify the Securities and Exchange Commission. This represents a huge leap in terms of thinking from governments (particularly the US) and I can only hope that they continue to make it easier for companies to raise the capital they need in this way, whilst continuing to protect the public from the shysters and the sharks.
By Henry Mitchell of The One Month Project.
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Tags: equity, finance, investing, investments, News, start-up funding
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