Crowdfunding is a relatively new concept and one that has generated a good deal of interest and debate. This has heightened following this month's publication of the views of the Financial Services Authority (the FSA) on crowdfunding.
Crowdfunding websites allow businesses to seek investment from members of the public online. The website will publish 'pitches' from businesses (often startups) in which those businesses explain what they do and why they need funding. Members of the public can read the pitch and, if they like the look of the company, they can invest in it.
Typically, crowdfunding websites allow investors to invest small sums (even as small as £10). Investors sometimes receive shares in the companies they have invested in but may receive some other reward (such as a discount on products sold by the business) instead. The FSA has been looking into this and has now published some guidance.
Pulling no punches, the FSA says that: "Many crowdfunding opportunities are high risk and complex. There is no guarantee that investors will receive a return on funds contributed to a crowdfund. In fact, investors could lose all of their money, as the majority of startup businesses fail."
The FSA goes on to say that the bulk of crowdfunding opportunities should be aimed at "sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money".
Importantly, the FSA also expresses a concern that "some firms involved in crowdfunding may be handling client money without our permission or authorisation, and therefore may not have adequate protection in place for investors".
This leaves crowdfunding companies, businesses that seek investment via crowdfunding and investors who use crowdfunding companies wondering how they should proceed.