The quandary of regulation

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Nick Moules
28th February 2013

There is no more divisive subject in the crowdfunding sector at the moment than regulation. On 26 February, rebuildingsociety.com talked and exhibited at the UK’s first crowdfunding conference, “Crowdfunding Deep Impact”, held at Hertfordshire University. Nick Moules outlines the basics of the argument for and against.

While everyone in attendance (including Vince Cable through a pre-recorded video) agreed that crowdfunding in its many guises is undoubtedly a positive movement for everyone – there were huge divides over whether regulation applied by the FCA would be appropriate for the market.

Part of the complication is down to the different types of crowdfunding available:

  • Reward. Piloted by the likes of Kickstarter – start-ups offer the finished product to people who donate the cash to back a project
  • Equity. Funds raised go towards an equity stake in early stage businesses
  • Peer-to-peer. Individuals lend money to other individuals and receive monthly repayments
  • Peer-to-business. Individuals lend money to established businesses and receive monthly repayments

It’s clear that a broad brush can’t be applied to all strands as they are so different in their outcomes and returns for the donator, lender or investor.

Sophisticated investor

One way of protecting people from the risk of losing money is to ask them to sign a waiver to say they are a ‘sophisticated investor’. This term irked several delegates because the product is a mass market product right now with loans from £10 upwards – it shouldn’t be available to a select few.

To put that into context, does someone need to be sophisticated to invest £100 in a start-up business? Is that any more risky than a £100 bet on the horses? You could argue either way, but there are no restrictions on over 18s placing bets of any size regardless of income, wealth or where the cash came from.

Some also felt regulation would be overbearing on a fledgling industry. Capital adequacy requirements for example could turf otherwise lean and efficient businesses out of the market or prevent new players coming in – as Simon Dixon of Bank to the Future put it: “imagine having a conversation with a potential investor where you said £100,000 is required to sit at the Bank of England and never see the light again unless you go bust?”

The compromise

A stick used to beat those in favour of regulation is that it failed to prevent the credit crunch and all the excesses of the period before. But shouldn’t we persevere with something that strives to make things fairer and safer? Although platforms in the sector act honestly and with the desire to protect the people putting up the money, they can’t protect them from the failure of forces out of their control – i.e. the borrowers defaulting using the margins created in the deals. Widen the margins and value is lost for lenders and borrowers. It also starts to look more like the very situation it was created to avoid.

Acceptance of this risk on behalf of the person parting with their cash and a formal code of practice for platforms to abide by is the sort of light touch regulation that will keep the spirit of crowdfunding alive and uphold the good reputation it has forged.

Whether it is compatible with the UK legal system as it stands and our unfortunate compensation culture remains to be seen…

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