With equity crowd funding platforms to be regulated from April 1st, this paper considers the strengths and weaknesses of this relatively new source of funding for businesses as well as the pitfalls of the regulation that is to be enforced.
Since recession took hold, lending to small businesses has reduced significantly as banks look to boost balance sheets to meet stringent capital adequacy requirements. Indeed, the impact of this is plain to see with lending to businesses down in January 2014 to £600 million, despite an economic recovery taking place. Crowd-funding or peer-to peer-lending exists with the aim of filling this void. Add to that the low interest rate environment which has resulted in savers getting a very poor return via the traditional savings routes, and the returns offered by crowd-funders starts to look very appealing indeed.
There is evidence to suggest that the growth of equity crowd funding may not be purely down to an absence of available bank credit, however, with only 40% of all UK SMEs making an application for credit in the last year, and only 1 in 25 of those that appliedbeing refused. ii
Following a 600% increase in funds raised via investment based crowd funding, the FCA have turned their focus to regulating this growing industry. The risk is that they kill it off.
Bow Group Head of Research and co-author Luke Springthorpe said: “This is a sector with a great buzz of excitement about it and it would be a great shame for this to be smothered by regulation. Worryingly, such regulation threatens to shut out the very people that make it a ‘crowd’ and has successfully allow fledgling companies access to a large pool of investors seeking high returns. Provided these investors are aware of the risks and are able to prove as much, there is no reason that the regulator or anyone else should prevent an individual from investing their money how they see fit.”