The FCA’s consultation on Crowdfunding, dubbed ‘the Regulatory Approach to Crowdfunding CP13/13’, has just been released and we’d like to know your thoughts on the guidelines set out and how you believe this will impact on the industry.
You can download the full document at the bottom of this page but, given that the document including annex, appendix and other information is more than 100 pages long, we’ve decided to share key extracts here.
“Professional investors may know more about investment in some enterprises and be better able to select the best investments, leaving options with higher risk or poor value to retail investors.” - Page 15
“… if the business is sold or becomes listed, investors may find their share in the profits is reduced if the value of shares is diluted by subsequent issues of new shares. Investors need to understand that they will have almost no control over these decisions.” - Page 15
“Given our consumer protection objective, our aim is to ensure that only those retail investors who can understand and bear the various risks involved are invited to invest in unlisted shares or debt securities. If firms target this wider but still restricted audience of retail investors appropriately, this may result in greater access to alternative (non-bank) finance options for businesses seeking finance.” - Page 36
“The information we have on investors in crowdfunded investments indicates that they tend to be high-net worth individuals) with investment experience. This observation is consistent with the fact that investment-based crowdfunding often gives access to Enterprise Investment Scheme or Seed Enterprise Investment Scheme tax reliefs. It is higher-rate tax payers who gain most benefit from such schemes.” - Page 37
“We have no evidence to show that the wrong type of investor is investing in unlisted shares or debt securities. It is possible our current regulatory approach is effectively preventing this.” - Page 37
“… to provide proportionate consumer protection and fairness for competing firms and products, we are proposing to apply marketing restrictions to firms that promote unlisted shares or debt securities, by whatever media …” - Page 38
“Investor restrictions: We are proposing to require firms that communicate direct offer financial promotions for unlisted shares or debt securities to ensure that they communicate such promotions to only the following types of retail client:
• retail clients who are certified or self-certify as sophisticated investors
• retail clients who are certified as high net worth investors
• retail clients who confirm before a promotion is made that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person, or
• retail clients who certify that they will not invest more than 10% of their net investible portfolio in unlisted shares” - Page 38
“Credit and investment risk may be the result of inherent information asymmetries between investor and borrower/issuer, as well as platform and borrower/issuer. Information asymmetries exist because neither the platform, nor the investor, has full information about the potential borrowers/issuers. Some investors may also lack the resources and expertise to carry out due diligence assessments of potential borrowers/issuers (where investors have a choice over how their funds are invested).” - page 43
“In crowdfunding markets, information asymmetries, and credit and investment risk, can be exacerbated if the incentives investors and platforms face are not aligned. For example, to build sufficient scale to achieve commercial viability, platform providers might be incentivised not to carry out adequate due diligence of potential borrowers/issuers. The absence of adequate due diligence by platform providers or investors might harm investors.” - Page 43
“Lack of investor sophistication may be exacerbated by behavioural biases, which are likely to interact and reinforce each other. They may result in insufficient due diligence on the part of the investor and/ or platform.” Page 44/45
If that wasn’t enough, you can download the full PDF of the FCA Regulatory Approach to Crowdfunding CP13/13 here:
Share your thoughts below.