“Crowdfunding: obtaining small amounts of individual funding from a large number of different sources through online platforms that match lenders and investors with businesses or individuals seeking finance”
Crowdfunding is a growing phenomenon worldwide but remains an unregulated activity in Ireland and a relatively small industry when compared to other countries – crowdfunding represents approximately 0.33% - 0.4% of the SME finance market in Ireland; in the UK it represents 12% of the SME finance market.
However, because crowdfunding is a disruptive form of SME finance (particularly for companies operating in the Tech sector) that can be combined with or act as an alternative to more traditional forms of financing, there will likely be an increase in its attractiveness as financing option.
In 2017 The Department of Finance conducted a six week public consultation into the potential regulation of crowdfunding in Ireland. An upshot of this consultation is the Department’s “Feedback Paper on the Regulation of Crowdfunding in Ireland” which was published in January 2018.
The Feedback Paper’s key findings include:
- There is general support for proportionate regulation of crowdfunding so as to grow the industry and improve Ireland attractiveness as a host country for international crowdfunding platforms.
- Regulation of crowdfunding should distinguish between crowdfunding that involves lending to individuals, lending to businesses and investment/equity crowdfunding.
- The main risks associated with crowdfunding are:
- Lack of understanding of the level of risk on the part of consumers. This could be addressed by the prominent display of warnings requiring users’ express acknowledgment before proceeding.
- Identity theft, money laundering, terrorism financing, data protection and fraud. This risk could be addressed by requiring mandatory user identity verification procedures before they can use a platform.
- Misleading and insufficient disclosure of information by businesses on crowdfunding platforms. Encouraging lenders/investors to undertake minimum due diligence standards and diversify lending/investment could assist in this regard. So too could placing an obligation on businesses to provide comprehensive and accurate minimum information, including information relating to the realisation or redemption of the investment.
- If the business fails or the crowdfunding platform itself fails, there is a risk that lenders or investors will lose their money. Means of addressing this could include: (i) the separation of client funds from platform funds; (ii) requiring minimum indemnity insurance levels for platforms; and (iii) ensuring contingency plans such as backup service providers.
- The absence of dispute resolution mechanism. It was suggested that there should be a clear complaints process outlining how complaints are made and to whom. Conduct of business rules were also considered but at a more mature stage in the industry’s development.
The European Commission has also proposed a regime for regulation of crowdfunding which is due to be discussed in March 2018. Regulation on a European level could potentially open up the Irish crowdfunding market to other Member States thereby increasing competition.
As the Department of Finance has stated that it will closely monitor developments relating to crowdfunding and implement European regulations as necessary, it is fair to say that there is a new SME regulated financing option only a short distance over the horizon.