More regulation is not the answer to crowdfunding failures

 
Robert Walsh
Did anyone spend time researching? (Source: Flickr/Alex Proimos)

Rebus Group collapse is bad news – but over regulation of alternative finance is not the answer.

The saga of Rebus Group – the company which failed after attracting more than £800,000 from a well-known funding platform – has attracted predictable calls for the alternative finance sector to be laden with further regulations.

The reasons for those rumblings are clear: Rebus secured its funding from 100 plus investors who were seemingly not informed of deep cracks running through the company when it pitched.As night follows day, the firm went bust – leaving those who had put sizeable amounts to work in the organisation with the hope of later seeing a profit, out of pocket and no doubt extremely unhappy.

The criticisms of this particular type of funding have been loud and plentiful.

Read more: Mondo and Pact: A tale of two crowdfunds and why they both matter

The main call being made is that there is a lack of transparency in pitches - a process followed by thousands of companies in the UK each year when they are seeking outside investment.

In this instance, it is argued that investors were not told that the company already had troubles and had indeed enlisted outside restructuring experts to stem the flow of a crippling cash-flow problem.

That has led to calls for deeper regulation of the sector, but to knee-jerk into this course of action would be the wrong turn akin to throwing the baby out with the bath water.

At a time when the UK needs investors to keep the economic recovery steaming ahead, it is vital the door leading to access to investors – and the opportunities for those with money to put to work – are protected at all costs. Putting in place unnecessary red tape would stem the flow of investment and ideas.

The alternative investment community – which has stepped in where the banks have left a void - sees the future. It is pitched to by dozens upon dozens of innovative companies with new ideas in areas such as fintech, tech and augmented reality. The UK government needs to do everything it can to keep these companies from seeking to flourish in far off lands only to ready to snap up and devour great ideas which can later be monetised.

There are more pressing matters at the heart of the Rebus situation. One revolves around due diligence and responsibility. The question is: how many of the 100-plus investors spoke properly to those running the company or even outside of the pitch situation? How many posed serious questions, or even spent some time researching on the internet? We may never know the answer.

Read more: Why equity crowdfunding is about more than just money

As with all investments, it would have been made clear that capital was at risk. But investors do need to take responsibility for their own actions. There is no safety in numbers in situations like these. There needs to be a greater understanding for the need of due diligence.

The second major point revolves around the importance of Angel Investors in the alternative finance sector. Angel investors often work as formal or informal syndicates. This will include sharing notes and bringing significant capital for investment, 50 per cent to 100 per cent of an investment round. The syndicates can be composed of diverse skill sets, – seasoned entrepreneurs, city professionals and family offices are often included in the round working together. But they bring a real expertise and know-how, contacts, advice and are involved in companies in good times and bad.

The real truth is we need all the tools available to encourage such investors and others aspiring to be like them to seek new opportunities, create jobs and companies for the new economy.

Putting in place overly stringent regulation would be like placing a stranglehold on innovation in the UK.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles