Crowdfunding has risen over the last ten years from a relatively new idea to a viable source of funding, seeing figures grow exponentially. But recently the landscape has been blighted by the collapse of several large-scale crowdfunding projects; Rebus, who raised more than £800,000 on equity crowdfunding site Crowdcube, and Welsh company The Zano which crashed to earth in November after initially becoming Europe’s most successful Kickstarter project.

And these two projects are not the exception – takeaway company Hokkei and shoe label Upper Street, which raised £320,000 and £243,000 respectively in 2015 on equity crowdfunding platform Seedrs, have both since gone into liquidation and research by AltFi Data and law firm Nabarro recently found that one in five companies that raised money on equity crowdfunding platforms between 2011 and 2013 had gone bankrupt. Thousands of investors have been exposed to risks far higher than may have been anticipated, especially since crowdfunding investments are not covered by the FCA’s Financial Services Compensation Scheme. So, should investors be more aware and should the sector be more regulated?

In a statement after the collapse of Rebus, crowdfunding site Crowdcube said:
“Whilst the failure of any business is disappointing, not all businesses will succeed and [it] therefore highlights the importance of spreading investment risk with a diversified portfolio…
“Investors on Crowdcube can be assured that we are committed to ensuring transparency and have rigorous due diligence processes in place.”

As it stands, the FCA do not regulate donation of rewards-based crowdfunding, such as those run by popular site Kickstarter. However, they do regulate loan-based crowdfunding and investment-based. In particular, they say that “we regard investment-based crowdfunding in particular to be a high-risk investment activity”, and advise investors that they are likely to lose 100 percent of their investment. This month, the FCA published the results of a review into the current regulation of the sector – but concluded that nothing will be changed from the “light touch approach” advocated in 2014, whereby the sector was allowed to grow largely on its own. In a statement in the published paper, the FCA said:

“We have seen the crowdfunding market continue to grow rapidly. We recognise that it is still early but, at present, we see no need to change our regulatory approach to crowdfunding, either to strengthen consumer protections or to relax the requirements that apply to firms.”

So, further regulation is not on its way any time soon – both good and bad news for the industry. Those seeking investment will still be able to attract investors fairly easily – but those investing still stand to be caught out by the attractive – but undeniably high risk – opportunities, with little or no protection.

However, with more and more stories of crowdfunding investments failing without offering a return, it is likely that investors are becoming wiser. Undoubtedly, the best advice for those considering investing in crowdfunding projects is that given by the FCA: “You should only invest money you can afford to lose.”

Miranda Wadham on 12/02/2016