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The UK ranked No 3 (#) in the world raising approximately $10bn of crowdfunding.
This option tends to be explored by businesses seeking finance after they have had funding declined by banks and other lenders. Crowdfunding typically takes place on a website and allows businesses (or individuals) to raise money from the public (an investor).
Crowdfunding opportunities typically offer higher returns for investors although they also come with a greater risk.
There are two main types of crowdfunding:
Loan/debt Based ( 'peer to peer lending') : where investors loan funds in return for interest and capital repayments; and
Investment/capital Based : where investors subscribe directly in securities being offered by the business.
Both of these are regulated activities under the Financial Services and Markets Act 2000 and whilst both types are regulated by the Financial Conduct Authority (FCA), there is no protection for investors under the Financial Services Compensation Scheme (FSCS).
The crowdfunding platform requires the owner to upload a business plan and certain financial information and then performs due diligence on the proposition. Once approved, the campaign goes 'live' for potential investors.
It is estimated 70% of all crowdfunding campaigns fail because they do not reach the target investment level and although some campaigns raise more funds than required. Just remember that failed campaigns are in the public domain and could impact the business in the future.
Loan Based
Very similar to taking a loan from a bank, although the loan is administered by the crowdfunding platform. You raise debt funding and agree to repay capital and interest over a pre-determined period of time.
Whilst this enables the business owner to retain 100% of the equity in their business, the loan may be secured on assets and/or by personal guarantee. Security and conditions are a function of the size of the loan.
It is reported that 93% (#) of campaigns were for debt funding.
Investment Based
Here the business looks to raise funds by issuing new securities (usually equity). This avoids the commitment to repay interest and capital and share the risk and rewards with new investors. If the business should fail, the business owner owes nothing to the investors.
This option can be attractive for the startup or growth stage business, who lack the financial credibility to raise debt funding. Inevitably the owners equity stake is diluted and this could lead to a loss of decision making ability.
Whilst not required, qualifying companies should seek advanced assurance from HMRC under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). These offer generous tax reliefs for investors and significantly increase the likelihood of achieving the target level of funding.
Popular Platforms
Kickstarter
The Funding Circle
Crowdcube
Seedrs
CircleUp
In April 2021 Competition & Markets Authority (CMA) blocked the proposed merger between Seedrs and Crowdcube, citing a loss of competition and innovation, however both platforms are loss making so their longevity may not be guaranteed.
The latest platform to enter administration is The House Crowd with investors being owed £53m with the expectation that they will suffer a capital shortfall. Its downfall seemingly resulting from its inability to strengthen its balance sheet and governance issues.
This article is for information purposes only and merely provides an overview. You are advised to take professional advice before committing to a crowdfunding campaign.
(#) source P2Pmarketdata 2020
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