Blog - The Verdict
MSB Solicitors Liverpool
Thursday, 02 April 2015 00:00

Crowdfunding is here to stay

Written by
Mark Forman is commercial partner at MSB Solicitors in Liverpool and deals with commercial law; commercial litigation and employment matters.

As any entrepreneur will tell you, getting a business idea off the ground isn’t easy - there are challenges along every step of the way. Who are my audience and how can I best communicate with them? How can I anticipate, and importantly achieve growth? And of course, how can I finance my business through the early stages?

In 2009, a new concept grew from the US and gave entrepreneurs and business owners across the globe an alternative option for raising investment. Crowdfunding affords enterprising individuals a platform to access millions of would-be investors, and enables individuals to group together to invest into a business opportunity that they would not otherwise have been able to.

Statistics indicate that around 95% of business plans are thrown out when they reach the investment phase, with creative, artistic and charitable sectors being among the most affected. The crowdfunding model then, was much welcomed by many.
The concept of crowdfunding is easy and convenient. Generally one pitch is made online to vast and varied audiences through specialist websites or across social media platforms.

As well as the potential to gain important investment, crowdfunding offers entrepreneurs the advantage of road testing their product or service before taking it to market; if there is an appetite to invest, there is likely to be a similar appetite from customers. By projecting your ideas into a public realm, you can obtain useful real-time feedback to help shape your ideas prior to launching.

It is little wonder then that crowdfunding has become not just a valid, but an attractive option for budding business owners. Since 2009, a number of niche crowdfunding sites have appeared online, providing an avenue for entrepreneurs in need of cash to take their idea directly in front of those who have it, and are actively seeking opportunities to finance.

Initially crowdfunding was primarily rewards-based, where investors would pay for products or experiences, or in some cases donate their money in good will, waving their right to any shares. But early examples of rewards-based crowdfunding left a bitter taste in the mouths of many investors.

More recently, there has been a shift and loan and equity crowdfunding now generates millions of pounds from investors online. The UK is leading the way in equity stakes ventures and is fast becoming recognised as leading the field in crowdfunded businesses.

In a market that has experienced such rapid growth and turns over a growing amount of capital, the safeguarding of both project initiators and project investors was imperative and the right protection had to be in place for both. 

Of the five main types of crowdfunding, two are now regulated by the FCA, as set out in the Crowdfunding and the Promotion of Non-Readily Realisable Securities Instrument 2014. While a discussion of regulation is outside the scope of this article, the regulation is relatively light touch as the Government has been keen to promote alternative sources of finance and not in any way seek to constrain this developing marketplace.
Crowdfunding is being experimented with as a funding mechanism for creative projects, philanthropy and civic projects, consumer goods and even real estate, with new and niche sites launching every day. There are some fantastic examples of where crowdfunding has worked well, but it is still only new as a concept and certainly the risks of total loss of investment is somewhat higher than with traditional funders backed by security over the business or personal guarantees from the directors.

In summary, crowdfunding is a relatively quick and easy way of raising monies and is here to stay.

MSB Solicitors work with a number of businesses across the North West which are raising monies via crowd funding platforms. These range from loans to fund a particular project through to taking shares in the business to fund business growth.  MSB Solicitors also work with crowdfunders and are advising on compliance with the FCA regulations.
Last modified on Friday, 10 April 2015 15:14

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