HM Insights

Crowdfunding: An Innovative Way to Raise Finance

The economic climate has made raising finance an increasingly harder challenge for all types of businesses, including social enterprises. As a result crowdfunding, among other forms of non-bank finance, are playing an increasingly important role.

Whilst there are many different forms of crowdfunding the most common operate on the basis of some type of reward based investment, for example an organisation may offer their new product as a reward in return for investment

Equity crowdfunding is distinct though as it allows individual members of the public to invest in a company in return for a shareholding in the company. Like any investment, the number of shares that an individual will receive for their investment is dependent upon the valuation of the company and the amount that an individual is willing to invest.

In the UK the legal framework surrounding crowdfunding is complex and highly regulated. The most significant regulatory issue with crowdfunding is that it is deemed to be a financial promotion, which is heavily regulated by financial services legislation. The financial promotion rules and regulations are designed to protect individuals who are deemed not to fully understand such a promotion

The term financial promotion is commonly used to describe the communication of an "invitation or inducement" to engage in investment activity. Typically you can only promote the opportunity to invest in equity to high net worth individuals (income over £100,000 per annum) or "sophisticated investors" (individuals deemed to have sufficient investing experience). This is contrary to the whole idea of crowdfunding. The whole principle of crowdfunding is that everyone is included.

Whilst a very complicated process, there are ways in the UK to promote to the general public. Last week, we launched our equity crowdfunding platform for companies looking to raise investment. We have worked alongside Entrepreneurial-Spark and NCM Finance Limited and we hope to start our first crowdfund in July. Further information is available here.

Once the financial promotion has been dealt with it is important to keep administration as simple as possible and then there is the challenge of how crowdfund investors work with more traditional funders. As crowdfunding is still relatively new, there is an element which remains to be seen on the views that future investors in subsequent funding rounds will take.

As such, while equity crowdfunding has been highly successful for some companies it is not straight forward and requires specialise legal advice.