A regulatory loophole has emerged which could allow retail investors to circumvent FCA rules requiring crowdfunding investors to be classed as sophisticated.
The FCA’s final rules on crowdfunding, published last week, stated investment-based crowdfunding can only be promoted to sophisticated or high net worth investors, retail clients who are advised or non-advised clients who are investing only 10 per cent or less of their net investible assets.
But when an investor “self-certifies” themselves as sophisticated, they have to meet only one of the four following criteria: that they have been a member of a network or syndicate of business angels for at least six months; they have made more than one investment in an unlisted company; they are working or have worked in private equity or SME finance or they are, or have been, a director of a company with an annual turnover of at least £1m.
In theory, retail investors making two £50 crowdfunding investments can self-certify as sophisticated when they come to invest again.
Using one crowdfunding platform, Money Marketing sister title Fundweb found that registering with a platform, passing a suitability quiz, entering bank details and completing an investment can be done in as little as four minutes.
An FCA spokesman says: “The 10 per cent rule means inexperienced investors will have to limit how much they can invest, making clear the risks involved.
“If an investor gains sufficient experience, they can self-certify as sophisticated and, to do so, will be acknowledging they understand and accept the risks.”
Chelsea Financial Services managing director Darius McDermott says: “This looks like a loophole. If the FCA’s intention was for unsophisticated investors not to have too much exposure then the regulator should look at this.”