The UK’s Financial Services Authority has issued consumer information warning that crowdfunding is too complex and risky for the ordinary investor.
As awareness grows crowdfunding is being looked at by more people as either a way of raising money for their business or campaign or as a different way of investing for a potentially higher return.
At present the crowdfunding market in the UK is very small as compared to the US and is usually organised via the internet with investors being asked to put in as little as Â£10.
But, says the FSA, although the upsides could be that you are supporting something you believe in or expecting a greater return than mainstream investing there are many risks.
Firstly, you could end up losing all of the money you invest as most start-ups fail.
Secondly dividends are rarely issued and your share of the project could diminish as more crowdfunders invest.
Thirdly there is also the time taken to generate any return, which could be considerable.
Fourth there is the issue of fund ‘illiquidity’, which means that getting cash back for the shares such as by selling them may prove nigh on impossible.
Fifth says the FSA is the ever present danger of fraud.
Then, as most if not all of these schemes are non-regulated, investors do not have the protection of the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS).
Many schemes are also not authorised to handle client money placing more risk on the investor.
Although many schemes run on an 'all or nothing' model where the money only goes to the investee if a specified target is met, some run on a 'keep it all' model so the investee decides whether to keep the money or not however much is raised. another thing for the investor to consider.
The FSA advises that only sophisticated investors should look at these as they will have an appreciation of how to assess and weigh up the business model involved. These investors should also not invest money in crowdfunding schemes that they were not able to do without.