Crowdfunding


Issue 162

Last updated: April 2019

 

 

 

The Growing Crowd

 

With bank interest rates at an all-time low, and unfolding economic, social and environmental crises, people are looking for both a higher return on their investments and to support businesses working for positive change. It is therefore not surprising that an alternative finance sector – crowdfunding – has evolved to link up investors with businesses and other organisations whose projects need funding.

“In 2012, less than £500 million was raised [in the UK] through a handful of [crowdfunding] platforms. By 2015, this had grown to more than £3.2 billion and at least 65 platforms.” Although reliable data for 2017 could not be found, since last writing about crowdfunding in February 2014, crowdfunding has continued growing and has now entered the mainstream financial market.

 

Image: Crowdfunding

 

As of April 2014, the Financial Conduct Authority (FCA) regulates loan-based and investment-based crowdfunding, offering ‘gold standard’ guidance on how to provide clear and sufficient information to investors to enable them to make informed investment choices.

‘High-net-worth individuals’ (as opposed to the smaller investor) and banks are showing interest in crowdfunding. For example, in 2016, Santander partnered with the Crowdfunder platform to support social enterprises and community projects across the UK, offering match funding of up to £10,000 to projects that were backed by ‘the crowd’.

In February 2018, Triodos Bank became the first UK bank to launch its own crowdfunding platform. People can now invest directly in equity or bonds issued by organisations delivering positive social and environmental impacts. The bonds are also eligible to be held in Innovative Finance ISAs (see page 19), allowing investors to receive the interest they earn on these investments tax-free. 

Dan Hird, Head of Corporate Finance at Triodos Bank, commented on the bank’s new platform:

 

“To tackle the big issues we face today we need to inspire investors to support progressive and pioneering businesses. We know the interest is there and, having seen the crowdfunding sector maturing in recent years, now feels like the perfect time to increase our presence in the ethical crowdfunding market. It aligns with our mission at Triodos Bank to make money work for positive social, environmental and cultural change.”

 

 

What is crowdfunding?
 

Crowdfunding comes in a range of models, all of which use the internet to connect people who are able to donate, lend or invest money with those who need financing for a specific campaign, business idea or product. This matching process is facilitated by crowdfunding platforms such as Crowdcube and Seedrs, who generally charge for their service if borrowers raise their target amounts (exceptions do exist).

What is exchanged for the money lent is one key factor that distinguishes different models of crowdfunding. Lenders may donate in exchange for:

  • The greater good (donations).
  • A product or reward of some sort (reward-based crowdfunding).
  • Their money back with or without interest (loan-based crowdfunding or peer-to-peer lending).
  • Shares in the company (equity-based crowdfunding).

 

Each form of crowdfunding carries its own level of risk, with loan and equity based crowdfunding being considered a ‘high-risk’ investment activity by the FCA. Start-up businesses generally have a high failure rate and, even if successful, can take years before you see a return on your investment.

When participating in loan-based or equity-based crowdfunding, or when investing in an Innovative Finance ISA (IFISA), your money is not protected by the Financial Services Compensation Scheme, meaning that you could lose it.5 A secondary market (one in which you can easily re-sell shares in small businesses) is also not yet well established, meaning that it can take a while to withdraw your money if you decide to do so. Because of these risks it’s generally advised that you do not invest more money that you can afford to lose!

 

 

Is it an ethical investment alternative?

 

Crudely answered, yes. Many niche crowdfunding platforms have developed, allowing investors to find causes they believe in, such as community-led renewable energy projects. This allows for rudimentary ethics screening based on the work a project or business does, but does not necessarily ethically screen the firm or people behind a project.

Ethical Consumer published a guide to Direct Ethical Investments in June 2016. This article features platforms such as Abundance and Ethex which provide ethical financial options for small investors and savers.

Some crowdfunding platforms such as Crowdcube have created forums where you can question a business about their credentials and ethics before you provide a loan or invest in them. Although this could potentially provide some social and environmental performance information, the borrower’s answers are not necessarily independently verified.

 

Four crowdfunding platforms: Abundance Energy, Lend With Care, Kiva and Buzzbnk, appear in our ‘Choosing Direct Ethical Investment’ listing.
 

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