The UK’s Financial Conduct Authority (FCA) will limit individual investors’ participation in securities-based crowdfunding and require loan-based operators to be more transparent, under new rules announced Thursday.
Crowdfunding is an increasingly popular source of finance for individuals, start-ups, and small and medium-size entities. In the UK, £28 million ($43 million) was raised for growing businesses through securities-based crowdfunding in 2013, up from £3.9 million ($6.2 million) in 2012. Lending to individuals and businesses through loan-based schemes (predominantly peer-to-peer lending) reached £480 million ($749 million) in 2013, compared with £189 million ($299 million) the previous year.
Under the FCA rules, which take effect April 1st, operators of loan-based platforms will be required to provide clear information about the prospective borrower to enable potential investors to appropriately assess the risk when making investment decisions. Operators will also have to ensure contingency plans are in place so that loan repayments can continue even if the online platform gets into difficulties. Capital requirements will be introduced gradually to help operators withstand any financial shocks.
Securities-based crowdfunding, whereby investors are offered shares or debt securities in a company, is already regulated by the FCA. The new rules stipulate that individuals without specialist knowledge cannot invest more than 10% of their available assets. Investors with relevant knowledge and experience, or who seek professional guidance, will be permitted to invest more.
“We have been careful to listen to feedback from the market, and the rules provide consumer protection, whilst allowing businesses to continue to have access to this innovative method of funding,” Christopher Woolard, director of policy, risk and research at the FCA, said in a news release.
The full policy statement on the FCA’s regulatory approach to crowdfunding over the internet can be downloaded here.
Related CGMA Magazine content:
“Crowdfunding Poses Benefits, Risks”: Although financial return crowdfunding does not pose systemic risks to the world economy yet, it does create problems for investor protection that need to be addressed, according to a new report.
—Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor.