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Crowd Funding- The Wisdom of Crowds - are you a part of it?. IoD 'Crowd Funding' Breakfast Seminar 29 January 2013 . Crowd Funding : What is it?. Crowd Funding is an internet-inspired means of raising money from the mass market, for a project or business.
Crowd Funding-The Wisdom of Crowds - are you a part of it? IoD 'Crowd Funding' Breakfast Seminar 29 January 2013
Crowd Funding : What is it? Crowd Funding is an internet-inspired means of raising money from the mass market, for a project or business. It is a relatively recent concept that originally had its origins in community and arts-based ventures, which members of the public were inclined to support for mainly benevolent reasons. © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : What is it? • Initially, businesses/ new ventures/ individuals approached the public at large for cash/ loans/ donations/ investment into their film/ music/ arts projects and in return the individuals would typically receive a gift such as tickets to a film premier/ opening night or a mention in the credits etc. • Crowd Funding was initially seen by many as a concept unsuitable for use in the business world. • Despite this scepticism, the tightening of banks’ lending criteria and unavailability of commercial finance has meant that Crowd Funding is gaining attraction on both sides of the Atlantic. • Crowd Funding creates investors and lenders out of a company’s customers, therefore creating loyalty within the company’s customer base. © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : Some definitions “The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically by the internet” “The democratisation of borrowing, lending and investing” “A continuous and growing series of virtual on-line auction houses, matching borrowers and lenders; investors and investees; and donors and donees” © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : Types of models Debt: Investors are repaid for their investment over a period of time at a specified rate of interest. Equity: Investors receive a stake/ shares in the company. Donations: Contributions go towards a benevolent cause with the ‘investor’ receiving nothing in return. Rewards: Investors receive a tangible item or service in return for their funds. (Invest in film, and get tickets to the premier.) © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : Examples • - British rock group Marillion’s USA tour was underwritten by donations from fans. $60,000 raised. • - “The Age of Stupid” was the first full length feature film to be financed entirely by Crowd Funding. £1.5 m raised. 2012 - Revolution Software Ltd, a video game developer based in York, raised $771,560 to develop the fifth entry in their Broken Sword adventure series, The Serpent’s Curse. Other non-corporate examples: disaster relief campaigns; political donations; scientific research etc © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : Where did it start? • Banks became risk averse and suffered solvency issues. • The cost of raising finance has always been expensive, particularly for small projects. • There is an altruism gene in everyone. • The internet changed everything! © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : Recent developments in the USA 5 April 2012, President Obama signed the JOBS (Jumpstart Our Business Startups) Act. Prior to this, US legislation prohibited public solicitation for private companies raising funds. The JOBS Act was due to come into effect on 1 January 2013 and whilst the main provisions of the Act took effect promptly, the Securities Exchange Commission in the US (the “SEC”) has missed the deadline to repeal the ban on general solicitation and advertising of private placements as required by the JOBS Act, and has not yet proposed a substantive set of rules to enable Crowd Funding to function effectively. The SEC will regulate Crowd Funding in the USA. © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : The size of the market USA: c. $900 million (2012) The World: c. $2 billion (2012) Forecast: $6.8 billion forecast for 2013 CFP= Crowd Funding Platform (Difficult to validate) © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : Increase in market size Equity based Crowd Funding has seen the greatest compound aggregate growth rate (CAGR) since 2007, however Rewards Based Crowd Funding still holds the lion’s share of the Crowd Funding market. © Lupton Fawcett Lee & Priestley 2013
Crowd Funding in the UK? Protection of widows and orphans/ investor protection is generally seen as a major issue. The Financial Services and Markets Act and the Financial Services Authority were both designed prior to the Crowd Funding concept. Current UK legislation is not fit for purpose and Crowd Funding businesses face a number of obstacles. Typically in the UK, lending is governed by the Consumer Credit Act and/ or the issue of a banking licence. The raising of share/ equity capital requires the issue of a prospectus or an investment memorandum. The targeting by private limited companies of potential investors is generally limited to high net worth individuals/ sophisticated investors. FSA approval can take 6 to 18 months. © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : Comments by the FSA and Government FSA : “Websites which allow businesses to raise finance from consumers should not be promoted to amateur investors.” FSA : “Crowd Funding website(s) … should be targeted at sophisticated investors who know how to value a start up business.” BIS : “The government is working with industry to support a range of new ways of lending and other innovative financial models.” (Code for “we are working on it!”) Vince Cable : “I want to see as much competition in the market as possible and for businesses to have access to a wide range of finance sources” © Lupton Fawcett Lee & Priestley 2013
The Regulations : Debt Crowd Funding WHO? There are numerous peer to peer (P-2-P)/business lending websites currently in the UK market place. Funding Circle, RateSetter and Rebuilding Society to name just a few. © Lupton Fawcett Lee & Priestley 2013
The Regulations : Debt Crowd Funding HOW? These sites are not deposit-taking institutions and are therefore not covered by the Financial Services and Markets Act 2000 or the Financial Services Compensation Scheme. Instead, these companies are currently regulated by the Office of Fair Trading under the Consumer Credit Act 1974/2006. The platforms must have a Consumer Credit License that will generally allow them to deal with the following: Credit brokerage Debt administration Debt collecting Provision of credit information services, excluding credit repair Provision of debt-adjusting on a commercial basis The application fee for a Consumer Credit Licence is £1250 and can take 25-50 working days. Government has, however, now made a move to regulate P-2-P lending and has amended the Financial Services Bill, currently passing through parliament. The Treasury will soon be launching a consultation exercise to decide exactly what form the regulation will take. Responsibility will be given to the new regulatory body, the Financial Conduct Authority (FCA), that will be taking over from the FSA on 1 April 2013. © Lupton Fawcett Lee & Priestley 2013
Debt Crowd Funding : Funding Circle Funding Circle Funding Circle is an online marketplace designed to help businesses find low cost loans quickly and investors get better returns. Businesses ask to borrow a specific amount of money over a term of either 12, 36 or 60 months. Individual lenders offer to lend the businesses their money at the individual’s chosen rate of interest. Businesses can then accept the offers with the most favourable interest rates. The businesses that have taken loans, repay Funding Circle part of the loan each month, and interest equal to the average interest rate attaching to each of the individuals’ loans. Funding circle then pay the individual lenders using an automated system that uses the individual rates of interest offered to work out how much each person is owed. Since Funding Circle launched in August 2010, more than 4,000 businesses and savers have signed up, with over £73,158,920m offered to businesses to date. Vince Cable recently announced that government is to bypass traditional banks and lend money directly to small businesses and traders in a £110m scheme, using 'peer to peer' internet-based lenders. Funding Circle, will receive £20m to lend to businesses. © Lupton Fawcett Lee & Priestley 2013
The Regulations : Equity Crowd Funding Types There are two main models in the UK for equity Crowd Funding: FSA Authorised (Unregulated collective investment scheme) (Seedrs Limited) Approved by an individual authorised by the FSA (Non-FSA authorised) (Crowdcube Limited) © Lupton Fawcett Lee & Priestley 2013
The Regulations : Equity Crowd Funding Under Section 21 of the Financial Services and Markets Act 2000 ("FSMA"), an unauthorised person is prohibited from communicating a financial promotion unless the content of the promotion is approved by an authorised person or is exempt. The exemptions are set out in the FSMA (Financial Promotion Order) 2005. These include promotions made publicly to "Investment Professionals”, "Certified High Net Worth Individuals" and "Sophisticated Investors.” Crowd Funding aims to hurdle/ get around these restrictions by utilising the current regulation in a way that was not originally intended or envisaged. © Lupton Fawcett Lee & Priestley 2013
Equity Crowd Funding : FSA Authorised (Unregulated Collective Investment Scheme) - Seedrs Seedrs Seedrs have FSA authorisation to arrange deals in units as an Unregulated Collective Investment Scheme (pooled investment). Seedrs rely on an exemption from the prohibition on promoting unregulated collective investment schemes by restricting access to its services to those investors which it has assessed as adequately knowledgeable to understand the risks of investing in a collective investment. Under the Code of Business Conduct (COBS) and in particular COBS4 (“Communicating with clients, including financial promotions”) and COBS 4.12that governs Unregulated Collective Investment Schemes, Seedrs are allowed to communicate to the public at large by: undertaking an adequate assessment of each individual's expertise, experience and knowledge so that the assessment can give reasonable assurance, in light of the nature of the transactions or services envisaged, that the person is capable of making his own investment decisions and understands the risks involved; (2) giving a clear written warning that enables the firm to promote unregulated collective investment schemes to the client; and (3) the client stating in writing, in a document separate from the contract, that he is aware of the fact the firm can promote certain unregulated collective investment schemes to him. This exemption is due to be repealed by the FSA and Seedrs are currently looking at ways which will allow them to continue approaching the public at large. © Lupton Fawcett Lee & Priestley 2013
Equity Crowd Funding : Non FSA authorised – Crowdcube 2. Crowdcube Crowdcube is a company ltd by shares. However, when investors sign up to the website they become a member of Crowdcube Ventures Ltd, a company limited by guarantee. Investee companies agree to become subsidiaries of Crowdcube Ventures Ltd for the duration of the time that they are listed on the Crowdcube platform. Thus, both Investor and Investee are part of the same body corporate and exempt from financial promotions regulations. The disclaimer on the Crowdcube website confirms that they are able to approach investors in this way under Article 43 of the Financial Services and Markets Act 2000 (FPO) 2005. This states: "Members and creditors of certain bodies corporate s. 43 (1) The financial promotion restriction does not apply to any non-real time communication or solicited real time communication which is communicated— (a) by, or on behalf of, a body corporate(“A”) that is not an open-ended investment company; and (b) to persons whom the person making or directing the communication believes on reasonable grounds to be persons to whom paragraph (2) applies, and which relates only to a relevant investment which is issued to an undertaking (“U”) in the same group as A. (2) This paragraph applies to— a creditor ormember of A or of U;” The Crowdcube platform allows potential investorsto invest in companies that pitch the merits of their business using the site as an intermediary. These investors receive an equity stake in the companies in which they choose to invest. Once the investment threshold is met, a Direct Debit facility called Go Cardless then takes the funds from the investor’s bank account (eliminating the need to hold client funds/ seek FSA authorisation). Following the recent FSA guidance published regarding Crowd Funding, however, Crowdcube have had to put a further hurdle in place that potential investors must meet in order to invest on the site. Potential investors must now self certify that they are either a high net worth individual or a sophisticated investor. This ‘should’ drastically reduce the amount of potential investors that are able to meet the required criteria. In practice it looks extremely unlikely that this will stop the average member of the public investing. © Lupton Fawcett Lee & Priestley 2013
Crowd Funding in our Region (1) Crowd Funding is having a large impact: Revolution Software A video game developer based in York, raised $771,560 by pitching its proposal to develop the fifth entry in their Broken Sword adventure series, The Serpent’s Curse, on Kickstarter, a rewards based Crowd Funding platform.
Crowd Funding in our Region (2) 2) SkinKind (UK) Ltd SkinKind (UK) Ltd is a family owned firm that for the last 23 years has successfully developed and marketed an industrial range of natural hand cleaning products to companies . It is now looking to raise £49,000 through Rebuilding Society to increase their prescribing doctors practices and increase the number of individual Doctors prescribing SK products.
Crowd Funding in our Region (3) 3) Brew Dog In 2009, as a 2 year old company Brewdog became a public company and the first company in Europe to sell shares online in a scheme which was fully authorised by the Financial Services Authority, through the company's own website. Over 6,500 people invested, giving the company capital for growth and investors an equity stake.
Crowd Funding : does the market place provide an opportunity for “Crowd Frauding?” Crowd Funding is currently in its infancy. Use of the current regulatory regime in a manner that was neither envisaged nor intended has led many sceptics to question what protections the average member of the public can fall back on if things were to go awry. Barbara Roper, director of investor protection at the Consumer Federation of America, warns against expecting too much from Crowd Funding sites. Crowd Funding “has precisely the same place in the average person’s investment portfolio that lottery tickets do,” she says. “If you have a little spare cash that you think it would be fun to gamble with, that’s fine, but don’t consider it part of a well-thought-out investment strategy.” Investing in start-ups, be it through a portfolio or individual investments, is not for the risk averse. © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : does the market place provide an opportunity for “Crowd Frauding?” Until Crowd Funding regulation is enacted in the UK, akin to the regulation that is soon to be put in place in the USA, should Crowd Funding carry a health warning? The FSA has produced guidance on the area, stating that “investors in a crowd fund have little or no protection if the business or project fails, and…they will probably lose all their investment if it does.” They are also concerned that “some firms involved in Crowd Funding may be handling client money without [their] permission or authorisation, and…may not have adequate protection in place for investors.” The hope is that regulation is put in place sooner rather than later that reduces an individual’s exposure in this type of investment and provides certain investor protections. If a ‘legitimate’/ transparent marketplace is created then Crowd Funding has enormous potential. © Lupton Fawcett Lee & Priestley 2013
Crowd Funding : The future Is this a market place with untapped potential? There will be casualties There will be consolidation The market will grow Technology will be the great enabler Regulation may take some time to develop Regulation giving lucidity to the current regime cannot come soon enough. If you would like to discuss this further then please don’t hesitate to get in contact: Andrew LindsayAdam Gray Tel: 0113 280 2025 Tel: 0113 280 2240 Email: firstname.lastname@example.org Email: email@example.com © Lupton Fawcett Lee & Priestley 2013