Following a surge in popularity for ‘alternative’ funding methods for small companies, a new regulatory body has been set up by the UK’s leading crowdfunding businesses.
In a move which represents a milestone in the development of a brand new funding industry, the UK Crowdfunding Association (UKCFA) has been formed to provide better protection for individual investors, and businesses alike.
What is crowdfunding?
Crowdfunding, which pools together small sums from a large number of individual investors to fund fledgling businesses and ideas, has become an increasingly popular way of raising funds in a non-traditional way, at a time when bank finance is harder than ever to secure.
According to the new body, individual investors plowed £10m into projects and small companies over the past year, and this figure is set to grow massively over the next few years.
There are several types of crowdfunding – including ‘donation’ (which exchanges money in return for intangible items, such as receiving tickets or acknowledgement of the investment), ‘debt’ (peer to peer lending, where investors receive interest on their investment), and ‘equity’ (where individuals invest money in return for an equity stake in a business).
Code of practice for crowdfunding firms
Members of the UKCFA will have to abide by a new code of practice (which you can view here) which will require:
a) separating investors’ funds from those of the crowdfunded business;
b) to ensure that all information and investments are kept safe;
c) a cooling-off period after an investment has been made;
d) details of the executive directors of the organisation’s member firms must be published online;
e) all IT and business processes must be ‘reliable and secure’;
f) members must comply with relevant sales and marketing regulations;
g) any complaints received by the trade body will be published on its website.
The organisation currently comprises 12 initial crowdfunding businesses, and their supporters.
The UKCFA says that it it is ‘committed to working with policymakers to help develop the right frameworks for crowdfunding’, especially in light of news that HMRC will soon create a regulatory framework for peer-to-peer lenders.