The Financial Conduct Authority (FCA) has announced that it will be looking to crack down on crowdfunding and peer-to-peer funding schemes. The reasoning behind it is that the potential investors are often not provided with a great deal of information about the investment, in particular the risk associated with it.
Crowdfunding is often used at an embryonic stage of business development and therefore is often higher risk than more traditional forms of public fund raising, although the amount invested per person is often relatively small. However, businesses proposing to use crowdfunding should be very careful. The law relating to public offers of investment is extremely complicated and subject to some fairly large penalties for getting it wrong.
One other issue with crowdfunding is jurisdictional. Many crowdfunding schemes are run online and therefore people from around the world have the ability to participate. However, the law works on a jurisdictional basis and just because you comply with one country's requirements, does not mean you will be complying with another country's rules.
The FCA has historically operated a fairly light touch with crowdfunding scheme. However, their recent announcement indicates that this might not be the case for much longer and we may see more regulation in this area in the future.
Crowdfunding firms should face a crackdown because people are unaware of the risks they pose, the UK’s financial watchdog has said. The Financial Conduct Authority found evidence of “potential investor detriment” and suggested peer-to-peer platforms should be governed by standards similar to those applied to mortgages.