Opinion

Crowdfunding vs Nanny

5 min read

01 March 2013

How can crowdfunding drive business growth when the FSA insist that investors need protecting from themselves? The City Grump urges crowdfunders to apply the law of KISS: Keep it Simple, Stupid.

What was probably the first conference on crowdfunding in the UK took place last week. Organised by Barrry James it produced excellent speeches from a range of top quality speakers. The audience wasn’t bad either!

Crowdfunding enables us to review individual businesses through the medium of internet platforms/marketplaces and decide whether we want to take an equity stake or loan capital therein. The crowdfunding platform usually charges a reasonable five per cent of monies raised and to date Crowdcube, the longest established platform, has raised £5.3m for its client companies.

The subtitle of the conference was “Deep Impact,” posed around the question of “is crowdfunding all set to make a significant impact on SME financing?” I hope so, as it seems to me that, as with so much of the internet, the wide dissemination of knowledge is power. For the first time, any of us can access the world of entrepreneurship quickly and efficiently and decide whether we want to back Company A, B or C. Or can we?

For many years I have come to the conclusion there are only three certainties in life: death, taxes and the Financial Services Authority. Yes, in amongst all the well-argued presentations at the conference lurked the elephant in the room – regulation. Bill Morrow, CEO of Angels Den – Europe’s largest business angel organisation – suggested that the moment the first widow or orphan complains that they have lost money on a crowdfunded investment, the FSA will be down on the offending platform like the proverbial ton of bricks.

What Morrow is alluding to is the power of the nanny. It is in the DNA of politicians and regulators to believe that they know better than you, dear reader. Therefore, you need protecting from yourself, don’t you? You cannot be trusted to make an investment decision for yourself. So, the politician and the regulator insist that you pass various tests before you may be permitted to invest equity into a company of your choice. This is what they call the “regulatory framework.” Sounds innocuous enough and Vince Cable in a video address to the conference referred, almost inpassing, to the need for a crowdfunding regulatory framework. But beware.

Crowdcube and a competitor called Seedrs have acceded to nanny by going through the exhausting and expensive exercise of becoming FSA registered. That’s alright then, isn’t it? Not really. In a sadly understandable effort to keep the FSA on side, these platforms now require either their potential investors to pass a suitability test or to become self-certified, sophisticated investors. Those of you who feel like signing up to the latter will be aware of course (not!) that this absolves the FSA of any responsibility to you whatsoever. This will present an interesting dilemma for many. In my view, this is the biggest threat to the ability of crowdfunding to impact the growth of SMEs. Too many users of the net will be put off by these absurd barriers.

It really doesn’t have to be like this. Instead, apply the excellent and effective law of KISS (Keep It Simple, Stupid). The first thing every potential investor of a crowd funded company should see in big bold red lettering is that “there can be no guarantee that you will get any or all of your investment back. Only invest if you recognise and understand this.” Once you have signed up, then you are at liberty to go ahead. In one simple act, it does away with that pernicious regulatory framework and empowers the investor directly.

Julie Meyer, CEO of Ariadne Capital, said, in answer to a question on politics, that the power of the internet, such as Facebook and Twitter, meant  state/regulation was inevitably going to fade away because today’s 20 to 30-year-olds are bypassing the old political order (as witnessed by the phenomenal success of Grillo in the Italian elections). The very term “crowdfunding” looks to the wisdom of crowds. Mr Crowdfunder, resist the beguiling embrace of nanny and adopt KISS now.