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The Financial Services Authority (FSA), a financial regulatory body in the United Kingdom, recently issued a warning to those considering investing in crowdfunded businesses.
“Many crowdfunding opportunities are high risk and complex,” notes the advisory. It also says that while crowdfunding can bring investors higher returns than traditional investing, these are “rare.”
The FSA suggests that all potential investors should ensure they “sufficiently understand the business or project, how and when you might get a return, whether you will receive an equity share in the business and the risks involved before investing in a crowdfund.”
These are fair warnings, and the CEO of UK-based crowdfunding platform Seedrs agrees.
“This is a welcome contribution to the information that's available: all of the risks they highlight are the same ones that we emphasize strongly when investors use our platform, and we agree entirely with their statement that this type of investing can make sense for investors who understand the risks as part of a diversified portfolio,” Seedrs’ Jeff Lynn told Mindful Money. “I'm glad to see the FSA has put this out, and I hope they will continue to work to understand and embrace the space."
UK’s crowdfunding regulation is lax, but not totally absent. While debt-based crowdfunding is almost wholly unregulated, the law firm Osborne Clarke writes that equity-based platforms “generally need to comply with financial services conduct of business requirements, such as assessing the appropriateness of investments for investors and holding client money in segregated accounts.”
The FSA is right to point out the dangers and risks associated with crowdfunding. Unlocking a new source of revenue to fund viable ideas, however, may have a positive economic effect long-term, even with the risks of legitimate failure and fraud taken into account. It remains to be seen how crowdfunding regulation will develop in the UK — or even if it will at all — but we will be sure to report the latest developments from across the pond.