What the FCA review on crowdfunding means for investors What the FCA review on crowdfunding means for investors

Darren Westlake, co-founder of Crowdcube writes exclusively for What Investment on the impact of the latest FCA review into crowdfunding for investors.

 What the FCA review on crowdfunding means for investors

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At the end of last year the FCA released its long awaited initial findings following a call for input on the crowdfunding industry.

It is expected that in 2017 the FCA will be introducing changes to the rules around the disclosure and transparency of information by companies raising finance through crowdfunding. However, what is clear from the announcement is that the FCA is keen to see crowdfunding continue to thrive. After all, access to finance via crowdfunding has facilitated billions of pounds of investment since it came into being just over five years ago, and has created thousands of jobs.

Changes to existing regulation is not unexpected: the industry has evolved and matured with platforms now providing a range of financial products, including debt funding and equity finance.

Read more: How do Crowdfunding companies do due dilligence?

While the new rules will apply to all forms of crowdfunding, the focus so far has largely been on peer-to-peer (P2P) lending, which in some cases offers products similar to more regulated products offered by banks; the FCA is understandably keen to ensure that consumers are adequately protected while promoting effective competition.

In addition, the FCA has raised concerns over levels of transparency and the ability of investors to compare product offerings, which affects all forms of crowdfunding.  It is one of the reasons why we published our Due Diligence Charter in November: so that investors have a clear understanding of the checks and processes we undertake before a business is  allowed to raise finance via our platform. Since then we have been calling on other platforms to do the same.

The FCA is also providing investors with greater disclosure to assess risk and return.   In November, AltFi Data published its second “Where are they now” report on equity crowdfunding and is an example that the industry is well aware of the necessity to keep investors fully informed of progress made by businesses, regardless of any additional regulation by the FCA.

AltFi Data’s report provides an emerging picture of how 751 companies in a total of 955 capital raises from 6 leading platforms are performing.  The results found that since 2011 just 88 of those raises have ended in business failure. Look deeper and the report includes a ‘traffic light’ system outlining how the portfolio of crowdfunded companies are performing.

AltFi Data’s approach has its merits in communicating quickly to investors a business’ performance in a relatively simply way and it, or something similar, could be adopted by all platforms quite easily.  It would also be far more meaningful if each platform were to update the information more than once a year, and it would encourage businesses to report their progress more regularly.

Overall the combined portfolio of the 6 platforms reviewed by AltFi Data calculates an IRR of 8.55 per cent, and 19.14 per cent if you include EIS/SEIS relief approach.  This could be seen as something of a result, but of course becomes more meaningful if a company can provide an exit.  To date, there have been six exits including Camden Town Brewery to AB InBev, e-Car Club to Europcar and, post the report, Oval Medical which has just been bought out by an American outfit. Exits are beginning to emerge, and it will be a matter of time before the successes versus failures can be fully appreciated and understood.

While waiting for the FCA to introduce the new regulations, it is clear that the crowdfunding industry is working hard to find its own way forward to make information more accessible and transparent.  Clearer guidance from the FCA will make disclosure across platforms more consistent so that products can be compared would be very welcome. However, the FCA also needs to acknowledge that the UK already has a well-regulated investment crowdfunding industry and in some cases the current regulation for our sector exceeds EU requirements and is more stringent than for other forms of direct investment.  And far from playing fast and loose with investors’ money, platforms are acutely aware of the need to evolve their own platforms and provide greater disclosure in order to keep attracting investment and ensure the long term health of the industry.

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