Corporate Matters — January 2014: the crowdfunding alternative

Crowdfunding as a way of securing investment is beginning to gain ground on both sides of the Atlantic. What are the current regulatory requirements and how is this likely to change?

Investment-based crowdfunding involves an entity seeking modest subscriptions from a large number of people, typically through a website operated by an authorised firm, as a means of raising funds. The subscribers receive a (modest) allotment of shares in return. Loan-based crowdfunding, also known as peer-to-peer lending, is also possible — and is increasingly popular — but the focus of this article is investment-based crowdfunding.

Investment-based crowdfunding platforms will carry on regulated activities — notably arranging investments — and will therefore require to be regulated by the Financial Conduct Authority (FCA). At present, the FCA imposes restrictions on firms applying for authorisation to operate an investment-based crowdfunding platform. These are reviewed on a case-by-case basis but the FCA will usually restrict the operation to promotions to sophisticated or high-net-worth investors. However, this is not a formal procedure and in the autumn the FCA opened a consultation on how to regulate investment-based crowdfunding on a more structured basis…

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