The potential of crowdfunding to unleash a nation of angel investors is being held back by the regulator’s refusal to allow people to use these platforms to back start-ups created by friends and family, according to venture capitalist Jon Moulton.
Mr Moulton, founder and managing partner of Better Capital, which specialises in company turnrounds, says the Financial Conduct Authority was mistaken to limit the ability of “unsophisticated” investors to use crowdfunding services to invest in companies.
“Investors want to support UK companies at a time when high street banks aren’t lending,” he says.
“However the FCA rules propose stopping those that are not classed as ‘sophisticated’ or ‘high net worth’ investing more than 10 per cent of their net investible portfolio in unlisted shares, unless advised. This is wrong.”
His views are echoed by crowdfunding website operators. Jeff Lynn, chief executive of Seedrs, says US law was a lot more accommodating to people who wish to put money into ventures started by friends and family.
“Most people who want to get a portfolio of investments pass the [FCA] sophisticated investor test,” notes Mr Lynn.
“Where we have concerns is where there are people who probably shouldn’t be investing in start-ups generally but are good friends with someone who is starting a business and wants to put £50 into it as an investment.”
A poll of 1,000 active investors, not classed as sophisticated or high net worth, conducted by crowdfunding platform InvestingZone found that two-thirds wanted more control over their investments and a third were frustrated with broker and adviser fees.
Richard Brockbank, co-founder of InvestingZone, says he welcomes the FCA’s regulation of crowdfunding because it standardises the rules and gives investors confidence to use it.
However, he claims that the benefits should not be limited to those classed as sophisticated investors or high net worth.
“At InvestingZone, we have gone to great efforts to make sure that the risks inherent in early stage investments are clearly presented on our platform and that only investors who understand those risks are admitted.
“With regards to limiting the amount that can be invested, we feel that this is patronising to investors who can demonstrate that they know what they’re doing but just don’t happen to be rich.”
Tom Ball, founder of NearDesk, a web business that enables people to rent desk space by the hour, was approached by an angel wanting to invest £50,000, who ended up investing through the company’s £84,500 crowdfunding campaign on Seedrs.
“Having the crowd attracted the angel and gave him confidence,” says Mr Ball. “Seeing a large amount go in gave the crowd confidence, so the two worked well together.”
The lines between angel investing and crowdfunding are and should be getting increasingly blurred, adds Mr Ball.
“The Seedrs nominee structure means that smaller investors are amalgamated into one shareholder so the old paperwork and communication problems go away.”
Another keen supporter of crowdfunding is Caspar Craven, co-founder of business analytics provider Trovus.
“We needed more working capital earlier this year [and] the offer from our bank frankly didn’t make sense for us,” he says.
“We turned to crowdfunding and raised all we needed within one hour. It was unbelievably quick and easy.”
The growth generated by the investment round has meant that Trovus is now looking at further financing rounds using crowdfunding platforms, adds Mr Craven.
“I’m on a mission now to share with fellow entrepreneurs how crowdfunding is a game changer for the entrepreneur.”
David Cross, an FCA spokesman, says the proposed rules would not prevent people from putting money into their family members’ start-ups on a one-to-one basis, but would limit the potential risks to individuals of losing money.
“I understand Mr Moulton’s criticisms, however, there is nothing in the example he cites stopping kin from investing in their family member’s venture,” Mr Cross explains, adding that the FCA’s proposed rules related to the promotion of unlisted shares through a crowdfunding platform.
“We want to make sure that those who are investing in quite high risk equities have the ability to either have access to advice or are sophisticated investors and have a limit on how much they could potentially lose,” he adds.
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