Crowdfunding regulation: What’s the ideal position? Sector must not run on due negligence

Justin Urquhart Stewart
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Via technology, crowdfunding is a reinvention of what the regional stock markets used to do
The dynamic growth of the crowdfunding industry in the UK is both an exciting and structurally important development for our economy. It has attracted a lot of interest, as excess money searches for better returns in a decade of low interest rates, low growth, low inflation and therefore, for many, low returns.
While many see crowdfunding as the great new innovation, I see it as a reinvention of what we used to do in the smaller regional stock markets – namely, look to raise funds from investors for new adventures and investments. But now, of course, with the application of new technology, such old structures can be reinvented in a far more versatile and cost-effective way. Thus, the excitement for these innovations will be carried along on a wave of populist entrepreneurialism, which I for one would certainly applaud.


However, let me also wave a flag of caution: unbounded investment freedom may play well initially to the dynamic bulls in the markets, but will very likely be seen as starry-eyed naivety when problems start to arise. This means that there is a pragmatic need for practical application of effective regulation to ensure that these developing markets are seen as both responsible and effective – and not just uncontrolled investment sources.
As we can learn from previous markets and innovations, reasonable controls are vital to encourage and sustain confidence. There will be failures and shortcomings, both with those providing the finance and those applying for it. Therefore, the need for due diligence on both investors and prospective investment companies will be vital.
Failure to do this can easily result in a poor reputation becoming systemic – irrespective of the fact that many of the participants are thoroughly respectable in all their business practices. As an example, you can look back at the wild and turbulent market that used to be the Vancouver Exchange. It had a reputation for “thrills and spills”, but was then sullied by an air of unreliability around some of the companies both floated and doing the floating.
London is quite rightly finding itself at the centre of some very exciting developments in fintech. To ensure that we build on this, it is vital that we are seen to be building responsibly to ensure that the right investors are being given the right opportunity to participate in the right companies and funds.


No regulation may be the desire of the pure libertarians, but fair regulation will be the route for growing a prosperous and trustworthy market, capable of withstanding the financial failings and fiascos that will inevitably occur. So my call would be to encourage the due diligence we are seeing on some platforms – both on the investors and on the companies themselves. Not having due diligence is, in my view, merely to operate a market with due negligence – and that pathway leads to doom. On the other hand, a reasonable structure to guide all participants will allow the UK to develop its reputation for effective innovation. Good markets attract good investors, and good investors will attract good investment opportunities. It is a virtuous circle bounded by the integrity of pragmatic rules.


City A.M. has partnered with Crowdnetic for the launch of its suite of UK crowd finance data. It features real-time information on private, UK-based companies publicly raising capital online through securities-based crowdfunding portals.

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