I don’t understand the legal details of most financial products I buy. I shouldn’t have to – I’m not a lawyer. To be honest, who reads 36 pages of legal jargon in a tiny font before opening a savings account anyway? However, I do expect to have a contract that is fair in accordance to English law, and I expect to know the key moving parts. Surely equity crowdfunding should be no different – and yet, it seems to be.
There are three key areas I see as vital when it comes to equity crowdfunding:
1) Who can invest?
The debate goes on and on about whether it should be everybody and anybody, or only sophisticated investors. The FCA has recently presented the result of a consultation on crowdfunding. We at SyndicateRoom feel that the outcome was very positive to the crowdfunding industry, so I will refrain from commenting too much. In my opinion, anybody that understands the following point and is legally allowed to place a bet at a high-street betting shop should be allowed to invest small amounts in startups.
2) What are the risks?
Easy – you can lose all your money. Next.
3) How am I, as an investor, protected?
Most (but not all!) equity crowdfunding platforms in the UK are knowingly ignoring this issue and keeping it as quiet as possible. This is unacceptable, but because the media doesn’t pick up on it the crowd is mostly unwary. Only sophisticated investors, such as business angels, are picking up on the issue, and are cherry-picking the platforms they invest through as a result. Business angels would never invest without having adequate protections, so why should the crowd? At SyndicateRoom, our members get the same protections as business angels who are investing in the same deal, which means that you get the same protections whether you are investing £1,000 or £1 million. No A-class shares for the main investors and B-class shares for the crowd, which is what seems to be the current practice with some crowdfunding platforms.
Coming back my initial point, a contract should be fair. What is the point of investing in the next Facebook if I’m still not going to see any money back, let alone the huge return you deserve for taking the risk early on? If you are giving money away to startups, go with whichever platform you fancy. However, if you are investing, be wise about which one you use.