As an alternative source of finance for start-ups, charities, projects and more, crowdfunding has the potential to disrupt the current norms and structures of lending and investment both in Ireland and internationally. The possible implementation of regulation could legitimise this emerging sector and allow crowdfunding to enter the mainstream, leading to a shift in how early stage funding is obtained.
What is Crowdfunding?
Crowdfunding is a way of raising money through the use of online platforms in order to finance a variety of activities. There are three main crowdfunding models:-
- Donation / Reward: where money is lent for charitable reasons or in return for a potential future reward (e.g. a branded t-shirt or first production run products).
- Lending: where money is lent either on a peer-to-peer or peer-to-business basis with the intention that it is repaid with interest over a defined period.
- Equity / Investment: where money is invested in a company or project in return for equity or a percentage of revenue / profits.
Ireland v UK: Approach to Regulation
At present in Ireland there is no regulation of crowdfunding and the only active models are the donation / reward model and the lending-based model. The equity model has failed to emerge in large part due to the inherent risks and lack of regulation.
The Central Bank of Ireland would be the entity responsible for any regulation of crowdfunding and has issued an Information Notice detailing the risks associated with crowdfunding, including:-
- loss of money due to failure of the crowdfunding platform;
- loss of money due to failure of the business or default on loan repayments;
- lower than expected return on investment;
- the provision of misleading or inaccurate information;
- lack of consumer understanding of the risks inherent in investments or lending; and
- fraud or money laundering concerns.
The Financial Conduct Authority (FCA), the UK’s financial regulator, has sought to address and mitigate these risks through the introduction of regulation. In the UK, the FCA is responsible for regulating investment-based crowdfunding and, since 1 April 2014, lending-based crowdfunding. The introduction of this regulation has served to legitimise crowdfunding in the eyes of the public and as a result the industry has grown significantly.
A recent report by the International Organization of Securities Commissions noted that “despite certain commonalities and divergences in various jurisdiction, and the potential risks and positive rewards, crowdfunding regimes are in their infancy (or have not yet launched) in most jurisdictions” and there is no common international approach to regulating crowdfunding. In Ireland, a Joint Committee on Jobs, Enterprise and Innovation issued a report in which it recommended, among other things, that “the Government should examine how to regulate the crowd-funding sector to afford better protection to both lenders and businesses”.
This demonstrates that there is a national and international focus on the importance of crowdfunding, particularly around developing proper regulation and oversight. In doing so, it will be fundamental to balance the protection of consumers with the requirements of business. Given the limitations on traditional sources of finance in recent years, the regulation and emergence of crowdfunding as a viable alternative would surely be a welcome development and could possibly lead to a shift in the way early stage companies are funded.