The UK has the potential to lead the world in crowdfunding, creating jobs and bringing growth. If policymakers are imaginative and far-sighted enough, this nascent industry could be a world-beater.
We use ‘crowdfunding’ as an umbrella term which includes a variety of alternative finance provision, involving the financing of crowds of businesses and initiatives by crowds of investors, usually via an online facility. The phenomenon has seen isolated examples of crowdfunding innovation develop in gaps and loopholes in the financial regulatory system – often depending on the most creative interpretations of the rules – and coalesce to form the beginnings of a collective movement.
BWB has been involved in advising on the set-up and financing of a range of crowdfunding sites and initiatives, funding, amongst other things, film, theatre, art, renewable energy, personal lending, public space, SMEs, charities and social enterprises. We see crowdfunding as a growing trend and have set up a dedicated crowdfunding service to cater for our client’s developing needs.
A global market
To date, arguments for Government support and regulatory reform have tended to focus on the potential of crowdfunding to provide new sources of finance to individuals and SMEs in the UK. However, this is to miss a trick. There is a potential global market in crowdfunding and – with the right regulatory regime – the UK is well placed to win a sizeable share of the worldwide market.
As a fraction of domestic finance provision, crowdfunding barely registers as a rounding error. Anecdotally, we hear that HM Treasury, which holds all the regulatory policy levers, has said it would not expect to create tailor-made crowdfunding regulation until the market reaches £1billion in size. However, if the argument is reframed in terms of UK competitiveness and the potential of the industry to draw inward investment, create jobs and promote growth, these are arguments which HM Treasury is more inclined to understand and the case for regulatory reform becomes stronger.
Put simply, the UK has the potential to build on its existing strengths in capital markets, professional services, technology and creative industries to be the world’s crowdfunding centre.
We could be a democratic finance hub, harnessing people power to finance useful things all over the world. There is also the potential for crowdfunding to help the UK achieve its development objectives, by financing microfinance and microsavings projects and other social ventures in developing countries.
The need for regulatory reform
There is a real risk that regulators and policymakers will see crowdfunding as primarily a consumer protection risk and will fail to see its utility.The existing regulatory framework, which is based on the Financial Services and Markets Act 2000, does not begin to contemplate modern crowdfunding. If crowdfunding is to develop in a sustainable and positive way, it needs a stable regulatory basis.
The US has stolen a march on the UK through the introduction of the JOBS Act, which exempts crowdfunding from mainstream US securities laws and creates a separate regulatory framework.
It is only a matter of time before other jurisdictions follow suit. What is needed is a balance between investor protection and a healthy respect for individual investor choice. The internet has transformed the media and retail industries and it is now set to transform finance, for the better. Some crowdfunding innovations will fail but many will succeed and some will succeed beyond measure. If this happens, we are likely to see the emergence of a new breed of financial institutions.
However, at the moment, any new business entering the crowdfunding space is subject to significant regulatory risk. It is important that new entrants anticipate change and act prudently to protect their business and reputation. Get your structure and your proposition right and there could be big gains.
We are yet to see institutions with global networks – the likes of Google, Twitter, Vodaphone or Virgin – investing big in crowdfunding and crashing the party. Surely it is just a matter of time. If policymakers are sufficiently fleet of foot, the UK could be the place to come to set up a crowdfunding business, seek crowdfunding investment and deploy crowdfunding capital.
Links with social investment
BWB has been promoting the idea of the UK as a global hub for social investment. Social investment is investment for social impact alongside financial return and the UK is leading the world in this area, with a number of innovations and initiatives. Over the last few months, we have been pleased to see the Cabinet Office and the City of London making the promotion and development of London’s place as a global hub for social investment official Government policy.
We have long been arguing for a reform of the financial promotion rules to make it easier for social ventures to approach the retail investor directly for investment. It is clear to us that there are strong parallels between social investment and crowdfunding - and we are not the only ones to think so.
The word on the street is that the FSA has set up an internal “social investment and crowdfunding working group” to develop proposals for a new regulatory framework. We understand that this is in part in response to the Government’s Red Tape Challenge on social investment and our paper on Ten Reforms to Grow the Social Investment Market, which sets out our views on crowdfunding.
What we need is a world class regulatory regime which sets the foundations for the UK to become a leader in social investment and crowdfunding and which properly joins the dots between the two. If the Government responds to this call, there is no telling how far these two movements can go.