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Does every crowd have a silver lining?

You would be forgiven for feeling pretty gloomy about the state of the UK economy and your potential investment opportunities following the Chancellor’s Budget last week. The news that the growth forecast for 2013 has been halved to 0.6% and the fact that the Bank of England’s interest rate is still at an historic low of 0.5%, is not encouraging. There is a silver lining to this big dark cloud however; crowdfunding. (Please follow the link for What is crowdfunding?) Perhaps due to the state of the economy, more and more crowdfunding platforms are appearing and people are starting to take note.

The FSA have this year approved the second crowdfunding platform – Crowdcube – meaning that investors using this platform will now be able to claim compensation from the Financial Services Compensation Scheme and access the Financial Ombudsman Service. Until this year, only Seedrs was approved by the FSA, but this does not facilitate direct investment in small businesses and instead holds shares on your behalf as a nominee. Crowdcube, however, does describe itself as giving “the UK’s entrepreneurs and business pioneers a new way to raise business finance by tapping into a ‘crowd’ of like-minded individuals willing to invest smaller amounts of cash in exchange for rewards and a stake in their business” and allowing you to become a direct shareholder.

If you are not sure it is for you, fear not, there are crowdfunding platforms out there for all tastes. If you are worried about future student debt and keen to encourage future entrepreneurs, take a look at Pave or Upstart. These are crowdfunding websites where investors can fund recent graduates and young professionals whom they think will become successful in the future in exchange for a portion of their future earnings. If you are feeling philanthropic and do not expect a return for your money see Spacehive, a funding platform for neighbourhood improvement projects, or Kiva, a not for profit organisation which enables loans from $25 for projects across the world with the aim of alleviating poverty. If you are keen to invest in a creative project in exchange for a reward such as a first edition of the product, see Kickstarter. If you are looking for a commercial investment, you have many options including the aforementioned Seedrs and Crowdcube.

Whether you always wanted to be a Dragon or are a proponent of David Cameron’s Big Society, crowdfunding is worth a look.

As a lawyer, however, I must finish with a note of caution. Before investing through these websites, do your due diligence. Ensure that the following questions are answered – does the platform operate an ‘all or nothing’ or ‘keep it all’ scheme? What exactly are you gaining in exchange for your investment? Will you be a shareholder and if so, what type of shares will you hold? Have you considered how long it will take to make a return on your money? Are you comfortable with the risk? What happens if the website or start-up/individual you have invested in goes bust or does not pay up? In short, treat these investments like any other commercial investment and seek advice when appropriate.

Some view these platforms as public markets without any of the controls that come with a listing on the stock exchange. I do not necessarily agree but am hopeful that more of these investment platforms receive FSA approval, as currently investors in a crowdfund have little or no protection if the business or project fails, and become realistic investment mechanisms for normal (if there is such a thing) people.

*In April 2013 the Financial Services Authority (FSA) was replaced by two new regulatory bodies, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Roberta Draper