Crowdfunding is a fresh new way to back business

THE emergence of crowdfunding, a new method of raising capital over the internet, is set to test how adept the coalition is at adorning London’s financial services crown with new jewels, particularly as attitudes to regulation turn from light touch to intensive interference.

Crowdfunding is a web-driven means of raising money from the mass market. Its earliest successes have often been with arts-based projects, but it is emerging as a fund-raising method for smaller businesses and commercial projects because traditional lending through banks is proving so difficult. Raising finance through a high volume of micro-investments can produce a cost-reward ratio attractive to retail investors and recipients.

So far, so good. However, crowdfunding in the UK is currently restricted by a prohibition on marketing “collective investment schemes” to the public. There are means of working around these restrictions, such as peer-to-peer lending or equity investment by knowledgeable investors, but these do not cater for micro-scale investors wishing to share in the profits of their chosen investment.

The Treasury wants to bring crowdfunding in from the cold and is considering tax reliefs as part of its Seed Enterprise Investment Scheme. The Department for Business, Innovation and Skills also sees it as valuable. However, with 70 per cent of UK regulation driven by Europe, how will Brussels react?

The European Commission is certainly being lobbied to pull down barriers – although its record for reducing financial services regulatory requirements is hardly cause for optimism. The Commission’s new Alternative Investment Fund Managers Directive (AIFMD), for instance, sets a high bar for investor participation in crowdfunding, as does the proposed European Venture Capital Funds Regulation. Any UK plan to facilitate crowdfunding has to harmonise with these EU regulations.

To set London apart on crowdfunding, the government must answer two questions. First, can investors without a Masters degree in Finance be trusted to understand disclosures that they risk losing all of their money?

The answer should be yes. In the UK, individuals can gamble their money in online casinos more freely than they can support the development of a small business.

Second, will the UK refrain from gold-plating European regulation and state clearly that the AIFMD does not apply to a crowdfunding provider? A cautious approach to the directive’s UK implementation could create debilitating uncertainty among crowdfunding providers.

The government needs to act decisively and quickly to ensure London gains first-mover advantage. In the United States, the Senate is refining legislation to carve out a place for crowdfunding, albeit one limited by minimum income requirements for participants.

The economic attractions could only be clearer to the government if it were re-named Big-Society-funding. The key question is whether the UK has the political will to distinguish itself on a world stage against a European agenda of pervasive harmonisation.

David Blair is head of regulation at law firm Osborne Clarke. Tina Lai is a regulatory lawyer in the Financial Institutions Group at Osborne Clarke and also contributed to this article.