The risks of crowdfunding
Rebus collapse increases demand for crowdfunding protections
US crowdfunding launch faces fight over rules
Company raised more than £800,000 through crowdfunding
Prompted calls for greater protecting of private investors
Investors were tempted by returns of up to 10x their investment within three years
Investors used crowdfunding platform Crowdcube
Rebus went into administration and now stand to lose investments of £816,790
The largest equity crowdfunding failure in the UK to date
Other companies have similarly gone into liquidation
1 in 5 companies that raised money on equity crowdfunding platforms between 2011 and 2013 had gone bankrupt
Investors stand to lose all their money when companies fail, since crowdfunded investments are not part of the Financial Services Compensation Scheme.
Alternative Business Funding
Portal for small companies seeking finance
Said crowdfunding platforms should protect investors by introducing insurance levies and publishing company failure rates
All peer-to-peer funders provide good levels of protection, most offering a pooled approach.
If this had been the case with the Rebus failure, investors would have lost a fraction of their investments
Innovative Finance individual savings account (Isa)
From April, peer-to-peer loans and debt-based crowdfunding will be included in a new isa
Will sit alongside individuals’ existing cash Isa and stocks and shares Isa.
The Treasury is still considering whether to include equity-based crowdfunding investments in the future.
FCA
Regulates the sectir
It regards equity crowdfunding “in particular to be a high-risk investment”, and that investors should be aware that “it is very likely that [they] will lose all [their] money”.
The investments tend to be highly illiquid as secondary markets are not established
Danny Cox
People really need to go into crowdfunding with their eyes open.
The real problem with equity crowdfunding is how investors can understand if they are getting a good deal
How are they are going to be treated as shareholders? And when will there be an exit, and will they then get good value for their investments?
All Street Research
Analyses crowdfunding and other alternative investments
Individuals should mitigate risk by undertaking detailed analysis before investing
Failure rates
Crowdcube said only 6% of more than 300 companies that have raised money through the platform have since failed
Highlights the importance of spreading investment risk with a diversified portfolio
Said he would suggest that investors wishing to access higher risk, high-growth companies consider tax-efficient venture capital trusts (VCT) or the enterprise investment scheme (EIS).
Both come with significant tax breaks, including loss relief, designed to support investment in early-stage UK companies.
It is not only those who invested in Rebus who stand to lose out.
The company seeks to bring hope to ordinary investors who have been misled into buying flawed complex financial products
While Rebus earned fees on the success or settlement of client disputes, it was also paid upfront fees to investigate claims
Individuals who made this down payment are also set to lose their money
The long-delayed introduction of crowdfunding in the US took effect amid warnings that the new market will be choked by regulation and an attempt by Republican lawmakers to relax the rules.
Law change 4+ years ago to open up investment in private companies beyond wealthy “accredited” investors was heralded as a breakthrough to allow anyone to back the next generation of tech start-ups
Regulators struggled with how to prevent fraud and money-laundering
Regualtors appears to not have trsut and confidnece that this marketplace can work
It seems like regulators have no trust that we can all successfully invest in each other
Finances have said that the complexity and uncertainty about the rules of crowdfunding have discouraged many companies from trying to raise money at the outset
SEC (Securities and Exchange Commission)
SEC’s regime will backfire on investors
Only companies that have no alternative may tolerate the regulations
CircleUp - online investment platform
The rules will lead to adverse selection that will leave only weaker companies using crowdfunding
The new rules
Require businesses to file accounts with SEC that have been vetted by an independent accountant
Forces companies to go public once their revenues reach a certain size
The challenge for SEC
“Finding the balance between unleashing the promise of
crowdfunding and not opening the door for boiler rooms and drug traffickers”,
Lead to a more cautious approach than some in the crowdfunding world may have wanted
Investment firms back the new crowdfunding market predict that there will be little interest at first, though private companies will eventually grow more comfortable with the rules
“It will level the field a bit with venture
capitalists.”
The market will allow private companies to raise up to $1m from the general public will start with a little bit of a whimper but could become a significant source of capital
StartEngine
It will be slow in the beginning mainly because of a lack of education among issuers
There have been a lot of naysayers and cynics, but the reality is
that it is groundbreaking
The McHenry bill
Mr McHenry is pushing a bill that he said would tackle the issues likely to make crowdfunding harder
Including disclosure requirements that kick in when 500+ investors are involved
10 page legislative text with 500 pages of regulations
Outsized and cumbersome
Almost lifts the limit on how much a single company can raise form $1m to $5m written in the original legislation
SEC crowdfunding law
Sets forth detailed requirements for our rules
Limits the SECs room for manouevre
They welcome input from investors and companies about how the requirements could be improved