UK Regulators Put Limits on Crowdfunding Participation by Small Investors

By Peter Bernstein March 07, 2014

There is an old saying that says you can’t get enough of a good thing. However, in the UK such appears to not be the case. In a move that is the regulatory equivalent of Charles Dicken’s A Christmas Carol grump Ebenezer Scrooge, the Financial Conduct Authority (FCA) has said “Bah Humbug!” to those who are willing to risk substantial portions of their income and saving on crowdfunding. It is a move that could reverberate around the world.

Let’s face facts. Most small investors are typically shut out from the IPOs of hot new companies. Yet as the astonishing increase in crowdfunded companies and activities (through such things as the widely popular UK site Croudcube) show, there is a seemingly insatiable appetite by people to help fund what’s next or what’s important. In a move akin to telling people how much of their savings they can use on such risky activities as investing in the stock market, or put limits on their gambling wagers, FCA is published rules to prevent ordinary investors from spending more than 10 percent of their savings on buying shares in peer-to-peer funded companies.

The (FCA) has moved to protect investors and stem the flow of cash from small savers towards crowdfunding platforms, which raise £1,700 (US$ 2850.05) an hour in the UK. Starting April 1, investment in companies who raise funds on crowdfunding sites that offer shares in ventures to investors will be restricted to savers advised by professionals, linked to corporate finance or venture capital firms, or those certified as sophisticated or high net worth. The kicker is that savers who do not tick one of these boxes will have to sign a statement saying they will spend no more than 10 percent of their assets – excluding homes and pensions - on crowdfunding in any given year.

The FCA says it is only trying to protect the young and elderly from squandering their savings. “Consumers need to be clear on what they're getting into and what the risks of crowdfunding are," said FCA policy director Christopher Woolard. "Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding."

A posting on The Guardian, quotes Barry James, founder of the Crowdfunding Centre, who said, "Make no mistake, the infamous 10 percent rule, however it's dressed up, takes the crowd out of equity crowdfunding. Over the centuries Britain has led the world with inventions and innovations – and then thrown away that lead."

The posting also notes that the rule change will not affect Kickstarter and other crowdfunding sites that do not offer shares in ventures but instead ask for donations. It also provided context about the robust crowdfunding business in the UK where investors have jumped on the chance to risk a little capital on such high visibility projects as the Pebble smartwatch, the Ubuntu Edge smartphone and the Oculus Rift virtual reality gaming headset.

Even assuming sympathy toward the goals of protecting those looked upon as possible prey by what used to be called “vulture capitalists,” how self-identification will stop anyone from investing in what they see as the pot of gold at the end of the rainbow seems problematic at best. 

It is difficult also to understand the distinction between out-sizing contributions that are donations versus investments in companies. What is does appear to do is assure that the UK’s financial services business gets cut in on the deal. Whether those opposed to the FCA’s rules can prevail in stopping the implementation of the rule is anyone’s guess.

What also remains to be seen is what the financial services folks in places like New York, Hong Kong, Frankfurt, Toronto, etc., decide to do to push regulators to emulate the FCA. Large financial institutions have cast a wary eye on crowdfunding since its inception, although they have also been players as investors. However, they don’t like being cut out of the action. It will be fascinating, to use a Star Wars movie reference, to see how the empires strike back to this increasing disruption of the force.    

Edited by Cassandra Tucker
Related Articles

Why Blockchain Could Be a Gamechanger

By: Paula Bernier    1/22/2018

Blockchain has become closely associated with the controversial topic of cryptocurrency. And that's fine because blockchain is an enabling technology …

Read More

Consumer Privacy in the Digital Era: Three Trends to Watch

By: Special Guest    1/18/2018

Digital advertising has exploded in recent years, with the latest eMarketer data forecasting $83 billion in revenue this year and continued growth on …

Read More

CES 2018: Terabit Fiber - Closer Than We Think

By: Doug Mohney    1/17/2018

One of the biggest challenges for 5G and last mile 10 Gig deployments is not raw data speeds, but middle mile and core networks. The wireless industry…

Read More

10 Benefits of Drone-Based Asset Inspections

By: Frank Segarra    1/15/2018

Although a new and emerging technology, (which is still evolving), in early 2018, most companies are not aware of the possible benefits they can achie…

Read More

VR Could Change Entertainment Forever

By: Special Guest    1/11/2018

VR could change everything from how we play video games to how we interact with our friends and family. VR has the power to change how we consume all …

Read More