The FCA are cleaning up on crowdfunding, following concerns that investors may not be fully aware of the risks and returns offered. The FCA have stated that they are considering new rules that provide fair and transparent offerings to investors.
Following a five-month review of the industry, the regulator commented that investors found it difficult to compare platforms and that there was a lack of compliance with the requirements to be "clear, fair and not misleading" in their promotions.
Crowdfunding is a way for companies to raise finance by asking investors for a small amount of money, typically for a return on their investment within a specified period of time and other business perks, for example limited edition products and services not available to the general market.
Companies seeking funding will typically set up a profile of their project on a website such as Crowdcube or Kickstarter, using social media and word-of-mouth to raise money and offer investment in their company to the market.
However, most crowdfunding companies are not authorised by the FCA and operate without offering a chance of redress for investors. If a particular investment fails, there is a higher risk of an investor losing all of their investment than through normal investment channels, as the funds are unauthorised. Investors would also not have recourse through the Financial Ombudsman Service or protection typically offered through the Financial Services Compensation Scheme.
The regulator's role is key to ensuring that investors are adequately informed in this growing area, however, we do hope that it does not lead to too much 'red-tape' in the industry, as crowdfunding is a growing market that could by suffocated by intense regulation.
Andrew Bailey, the FCA chief executive, said: “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. Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas.”