by Vinay Basra - 18th March 2014
The Financial Conduct Authority (FCA) dropped a bombshell on crowdfunders last week with new regulations designed to limit the amount that private investors could invest in crowdfunding. Many pundits initially reacted with dismay, saying that it 'took the crowd out of crowd funding'. Don't be so sure - there is a loophole in the regulations which you could drive a double decker bus through.
The Guardian explained the regulations put in place by the FCA: "Investment in companies who raise funds on sites such as Crowdcube by offering shares in ventures to investors will be restricted to savers advised by professionals, linked to corporate finance or venture capital firms, or those certified as sophisticated or high net worth. Savers who do not tick one of these boxes will have to sign a statement saying they will spend no more than 10% of their assets - excluding homes and pensions - on crowdfunding in any given year."
Many pundits reacted badly, as this is a novel way of boosting a new business venture without resorting to traditional investors who want a big cut, or even trying your luck on the BBC's Dragon's Den. Observing that the French government has just made it easier for crowdfunding to be used to seed businesses, Stephen Hazell Smith of the AIM alternative investment market said, "How absurd to have the French beating us in a sector where we have the infrastructure in place to lead the world." Look closely at the regulations however and almost anyone can invest what they like in crowd funding. You are only limited to the 10% rule the first two times you invest, and then you only have to 'self-certify', which means anyone can say that they are a business angel or a professional investor. In theory this means that in order to qualify as a 'sophisticated investor' you only need invest £50 in two other businesses and then can invest whatever you like, in whoever you like. In short, with a little thought, the new regulations won't bother anyone who has invested in crowdfunding before.
The regulations in place are designed to prevent inexperienced investors from taking huge risks and waking up one morning having lost their shirt. It is important to remember that many start-up businesses will go belly up and the best bet for investors is to spread your investments so that some win and some lose. The regulations are ineffective but the reality of taking a punt on a fly by night investment could mean you lose a lot of money. As always, invest wisely.
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