Investments are a Risk and the Pope is a Catholic

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Julian Wells
14th August 2012

We were delighted to see the FSA publish guidance on crowdfunding this week, although we have a different view on certain issues.Crowd funding cheque circle

To say investing via crowdsourcing is a risk is not as obvious as statements like ‘Usain Bolt can run’ or ‘Rory McIlroy could handle himself on your local municipal’, but the FSA’s guidance seemed to be imbalanced, so it’s only proper to provide the other side of the argument.

Of course there are risks in investments, but the model has seen widespread success in the US and is recognised as a growing market in the UK, recently breaking the £250m barrier for money invested. Investors looking at crowdfunding will already be aware that they could lose cash if the business fails – so rebuildingsociety’s grading makes it easier for investors to pick the risk level that matches their appetite.

And while the regulator recommended that only experienced investors should consider crowdfunding, it overlooked the fact that for many would-be investors, crowdfunding can be an introduction to the investment space, with small amounts able to make a big difference to businesses looking for finance. It also allows investors to spread their risk through a number of investments.

Another warning was ‘remember that most start-up businesses fail’, but remember most businesses cannot get the finance they need from traditional finance sources so they are not getting the opportunity to become a success in the first place. Logically there will be more viable businesses out there as banks tighten their lending criteria and crowdfunding can exploit that opportunity.

Crowdfunding is also symbolic of the public’s desire to explore alternative sources of funding and make their own rules to overcome blockers on finance from regulated organisations offering regulated products.

Perhaps inevitably in the future more regulation might apply to crowdfunding, but for now the speed and ease of doing business are some of its biggest strengths, the sort of benefits easily swallowed up by the burden of regulation and visible whenever one deals with a high street bank.

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