“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.