“Crowdfunding” is the word on everyone’s lips at the moment. In the business world it is fast becoming a favoured way to finance up-and-coming businesses. There is no doubt that it has a useful role in the business world. There are, however, legal issues that should be considered.

For those of you unfamiliar with this term, Crowdfunding is a word that has been coined to refer to a wide range of situations where individuals pool their money, usually via the internet, to support a third party in efforts ranging from starting-up a business to providing disaster relief. The informal manner in which Crowdfunding occurs can be a cause for concern, particularly when viewed in light of compliance and ‘financial promotion’ legislation.

The FCA, however, seem to be getting more comfortable with the concept although there are still a number of issues for businesses to consider, such as:

• Have the required warnings been given to potential investors?;

• Is equity being offered? Are loans being requested? If so, extra care should be taken;

• Whether inadvertently or otherwise, do the potential investors expand beyond those that are deemed to be ‘high net-worth’ or ‘sophisticated’ investors?

As a general rule, we would advise that Crowdfunding is undertaken through a registered broker and that legal advice is sought before embarking on a Crowdfunding exercise to ensure that it is being conducted properly and in accordance with the law.

If you would like to discuss Crowdfunding or any other financing issues, please do not hesitate to contact Caroline Cropley, of Druces LLP’s Corporate and Commercial Team.

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