A war of words over the way financial regulators define online fundraising has escalated, after the head of the crowdfunding industry body accused her peer-to-peer lending counterpart of being unhelpful and inaccurate.
Julia Groves, chair of the UK Crowdfunding Association (UKCFA), was responding to claims by Christine Farnish, her opposite number at the Peer-to-Peer Finance Association, that the Financial Conduct Authority was mistakenly using the word “crowdfunding” as a catch-all term for both debt and equity fundraising.
Last week, Ms Farnish criticised the regulator for using the hybrid phrase “loan-based crowdfunding” in its consultation on regulation – arguing that it was meaningless, because it mixed-up peer-to-peer lending with equity crowdfunding.
“Language is important,” she said. “This is a regulator that should know better. It seems that it is just convenient for them to lump all this new stuff into one bundle. But that confuses everyone.”
However, Ms Groves has hit back, pointing out that some crowdfunding platforms do facilitate loans through debt-based securities, which provide a relatively low-risk way for individual investors to lend to businesses.
“Any suggestion that crowdfunding is just about taking equity in early-stage businesses is both unhelpful and entirely inaccurate,” Ms Groves said.
Both sides are keen to see the market legitimised by government regulation but are concerned that providers – whether they be peer-to-peer lenders or crowdfunding marketplaces – will be penalised if the rules are poorly framed.
In recent years, crowdfunding has become a loose term for various funding methods, ranging from people taking equity stakes in new ventures to causes looking for donations to get off the ground.
Kickstarter, the world’s largest crowdfunding platform, has a stated mission to help bring creative projects to life. Those pledging money over the platform tend to be offered free samples or special experiences rather than shares in return for their cash.
Peer-to-peer lenders differentiate themselves from such crowdfunders by focusing purely on linking companies or individuals with other people who are willing to lend them money at a certain rate of interest.
The FCA tried to create a distinction between these different forms of web-based fundraising by announcing plans to create separate levels of regulation for debt and equity funding services, Ms Groves noted.
This, she claimed, was more important than arguing whether debt-based fundraising should be classed as crowdfunding or peer-to-peer lending.
“The characterisation of peer-to-peer simple loans versus debt-based crowdfunding models as low-risk versus high-risk is, in our view, a mistake,” she said.
“Both models allow retail investors to access lower-risk assets, but where there is a debt security or a retail bond the funds are raised by a public limited company with a full offer document and higher standards of disclosure. That these should be treated as higher risk than a simple loan is counterintuitive.”
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