As the FCA continues to reveal its regulatory plans for a number of areas, the latest published proposals focus on crowd funding. As set out on the IFA Magazine website, “Crowd funding is a way businesses, organisations and individuals can raise money. Generally, it involves a number of people pooling money through a website often called a platform.”
Therefore, crowd funding is a relatively new investment concept which many believe will continue to grow. As a result, regulation of such investment types has been welcomed by many as this is seen as a way of filtering the genuine, risk-aware investors from the rest, making it a generally safer and stable market.
The key changes put forward by the FCA relate to equity investment based crowd funding and peer to peer lending which has been described as a “rapidly evolving” market. As is consistent with much of the FCAs recent proposals and rhetoric, they have set out to ensure consumers in the crowd funding market get clarity from the outset, meaning they are aware of what they are investing in before they do so.
This, they have said, can be done by simply providing consumers with explanations of key features of the loans beforehand. In addition, consumers must be informed of the risks, particularly as crowd funding is relevant to small and start-up businesses whereby an initial loss on investment is not uncommon. This point is primarily aimed at investment-based crowd funding, which is already regulated, as the FCA want potential investors to be made aware of risk so they can be prepared financially for any possible losses.
Consequently any promoting of crowd funding must be fair and aimed at the right audience and firms should not allow individuals to invest unless they are deemed appropriate to do so. A 14 day period has also been proposed whereby either side can withdraw from the investment agreement without penalty.
The FCA is positive about the crowd funding market and is hoping these proposals will encourage competition and make the market more accessible, whilst also allowing consumers to feel protected from the outset as a direct result of greater clarity about their investments.
By Geoffrey May, graduate paralegal in the Regulatory team