Member Article

Crowdfunding: Creating a public market without the controls

James King is MD and co-founder of Find Invest Grow (FIG), a venture capital grouo that focuses on the student and recent graduate demographic. He looks critically at crowdfunding.

This week, the UK’s Financial Services Authority (FSA) issued a stark warning that crowdfunding poses too great a risk for the ordinary investor.

Crowdfunding or, as we like to call it, crowd-venturing is when there are large numbers (30+) of investors, investing for equity. In nearly every instance, this is inappropriate for the retail investor. We welcome the FSA taking this stance, as without protection from the Financial Services Compensation Scheme (FSCS) or
Financial Ombudsman Service (FOS), people are likely to end up hurt or angry.

At present, the crowdfunding market in the UK is very small compared to the US, and is usually organised via the internet with investors being asked to put in as little as £10.

The FSA believes that most crowdfunding should be targeted at sophisticated investors, those who will have an appreciation of how to assess and weigh up the business model involved. Whether the crowd-venturing model takes off with these investors is another matter entirely. Yes, they know what they’re doing and understand the potential risks, but most investors would seek to approach companies directly to avoid the very high fees. They might also wish to be actively engaged – something crowd-venturing cannot provide.

If companies want to raise money from the general public they should list on a public stock exchange and provide the relevant material and public updates. But for a start-up the difficulty and significant cost in producing these, and the resulting business administration from having hundreds of investors on a share
register, is punitive.

In short, crowd-venturing is effectively trying to create a public market without the controls. While it works well for social projects or where benefits can be realised in creative projects i.e. you receive a copy of the book or get to design a character in the game, we don’t think it’s the most appropriate form of investment out there.

We believe that when start-ups take money, it’s incredibly important they take it from value-added investors. Crowd-venturing will likely end up with either too many chefs or no chefs in the kitchen! That said, passive investors do play a valuable role in providing finance for start-ups. But, in our opinion, their best option is to find a sector or demographic they’re interested in, and invest through a recognised venture capital fund.

This was posted in Bdaily's Members' News section by James King .