Focus on crowdfunding – overcoming regulatory hurdles

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For start-ups seeking funding, life is hard. But for those contemplating going down the crowdfunding route the task became just that little bit tougher in December after the UK’s Financial Conduct Authority (FCA) announced a tightening up of the rules governing the area.

To a degree crowdfunding is a victim of its own success. As the FCA noted when it announced its latest review in July, in 2015 it was estimated that over £2.7bn was invested in start-ups on regulated crowdfunding platforms, up from £500m just two years previous.

The FCA only introduced its rules for the crowdfunding sector in 2014 and as of July it suggested that over 100 platforms were either operating or seeking authorisation.

To an extent crowdfunding was of a lesser concern than the P2P lending market in the UK where the financial watchdog has become concerned about platform such as Funding Circle and Ratesetter acting more like lightly-regulated banks rather than pure P2P platforms.

But the FCA is clearly worried about some aspects of the crowdfunding market. The body noted that it is difficult for investors to compare crowdfunding platforms with other asset classes due to the complex and often unclear product offerings. It also found some investors had difficulty assessing risk and some promotions did not always meet requirements to be clear, fair and not misleading.

“Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers,” said Andrew Bailey, chief executive of the FCA. “Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas. We plan to consult next year on new rules to address the issues we have identified.”

The tightening of the rules regarding crowdfunding come at the end of a year where we have seen a trickle of gambling-related companies seeking funding via crowdfunding platforms. Back in May, Football Index’s offer on the Seedrs platform exceeded its target of raising £800,000 to amass a total of £1.15m for a pre-money valuation of £4.5m.

In November another football betting-related start-up called Premier Punt, a daily fantasy sports (DFS) business, launched another Seedrs campaign, aiming to raise £200,000 for a pre-money valuation of £2.8m. As of late December, the money raised had almost reached its target with funds committed of over £180,000 and with almost a further month to go on the offer.

Founder and chief executive at Premier Punt, John Gordon, answered some of the criticisms around the transparency of crowdfunding. “Investors can also see how their support will help us and, importantly, it allows anyone to get involved from large venture capitalists putting in five figures to the casual investor, or even Premier Punt users who like what we do and want to put in a smaller amount and be a part of our journey.”

Gordon also suggested the crowdfunding campaign acted as a form of user testing. “Raising this investment will help us to continue to build what we believe is a superior product and, by listening to and acting on the feedback of our users, we want to add the features that our customers want, attract new customers and ultimately create the market leading product where users can compete for big money prizes in an exciting and fun way.”

Not every gambling-related crowdfunding effort has been so successful in raising the desired funds. The social betting app WantMyBet went with an offer again on Seedrs in the summer but failed to hit the £200,000 target. Olly Joshi, founder and chief executive, told GamCrowd back in October the failure of the investment effort was one of timing more than anything.

“The fundraising wasn’t as successful as we had hoped,” he said. “We were a bit impatient and time just wasn’t on our side. Before you go live on a crowdfunding platform, you should really have around 30% of your target already pledged, in order to give it some momentum when you put the offer live. But we just didn’t have the time, so we went live with about 10% pledged. We just didn’t get the momentum.”

What links these gambling-related successes (and just the one failure) is, of course, the platform. This year Seedrs has proven to be a happy hunting ground, not just for those looking to invest in gambling start-ups. Data from the Liberum AltFi index shows that in the last three months of 2016 the Seedrs platform raised 45% of all crowdfunding investment.

Seedrs itself responded to the FCA proposals in December, saying that it fully supports the work being undertaken by the FCA and that it will continue to engage in the ongoing review process.

“We were the first equity crowdfunding platform to be authorised by the FCA back in 2012,” said Karen Kerrigan, chief legal officer at Seedrs. “Since then, we have worked hard, not only to maintain high standards of regulatory compliance ourselves, but promote them across the industry.

She added that Seedrs welcomed the FCA’s efforts to continue to improve the regulatory regime, and hoped this would help the UK maintain its position as the world-leading market for equity crowdfunding.