UK new crowdfunding rules: implications for small businesses

If you're looking to crowd fund money for your business, find out how the new regulations might affect you.

New Financial Conduct Authority rules regulate certain types of crowdfunding. Photograph: Alamy

New Financial Conduct Authority rules regulate certain types of crowdfunding. Photograph: Alamy

Jonathan Thornton and Guy Wilmot | Guardian Professional, 22 April 2014 – SMEs are increasingly looking at crowdfunding as a way of raising finance without dealing with bureaucratic banks and fickle investors. However, new rules by the Financial Conduct Authority (FCA), which came into force recently, regulate certain types of crowdfunding.

Crowdfunding involves raising finance by taking small investments, loans or donations from a large number of people. Depending on who you believe, the new FCA rules have either “taken the crowd out of crowdfunding” or “represent the right balance between the freedom to invest and investor protection”.

Ironically, both those quotes come from the founders of crowdfunding businesses. With such a range of views, it’s probably fair to assume that the FCA has got it about right.

What the FCA has done is to to regulate loan-based crowdfunding (also known as peer-to-peer lending) and investment-based crowdfunding.

Loan-based crowdfunding, as the name suggests, involves the lending of money. Investment-based crowdfunding usually involves subscribing for shares or some other form of securities.

Traditional pledge-based crowdfunding remains unregulated. So if you’re looking to raise money by donation or rewards-based crowdfunding, you can breathe a sigh of relief. The regulations don’t cover you.

The FCA believes that loan-based crowdfunding, often called peer-to-peer lending (P2P), is less risky than investment crowdfunding and P2P lending will be more lightly regulated. These regulations require P2P platforms to carry a certain amount of capital, to describe risks accurately and to have a resolution plan in place in case the platform fails.

These rules may raise costs and make P2P slightly less attractive in terms of lending rates. However, borrowers do not generally have to worry about the administration of multiple loans – this is all handled by the platform and their technology.

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