Crowdfunding has been in the news increasingly as a way to raise money. For certain businesses, there is the added bonus of being able to offer an exciting opportunity to spread the word about their products and brands and to create a loyal and passionate customer base.
Cripps Pemberton Greenish acted on a substantial, innovative and successful crowdfunding project recently and we would be delighted to talk to any housing associations who want to explore this option as a way of generating funds where, for example, traditional lenders may not be willing to help in full or at all.
Broadly there are three types of crowdfunding:
- loan-based crowdfunding- people lend money to individuals and businesses in the hope of a return in the form of interest payments as well as a return of capital
- investment or equity-based crowdfunding – people may invest directly or indirectly in a business by buying shares or debt securities
- donation or non-financial rewards based crowdfunding – people invest with a view to benefitting from some other form of reward, be it publicity, or being able to obtain discounted products from the business in question or simply out of a desire to help a good cause, possibly the most appropriate for charities and not for profit organisations.
Crowdfunding may be subject to regulation by the UK’s financial regulator, the Financial Conduct Authority. The purpose behind the regulation is to reduce the risks to consumers and to provide a credible alternative to traditional methods of financing. This is important because part of the reason for the popularity of crowdfunding has been the lack of bank lending to small businesses in recent years. Crowdfunding may also be cheaper than bank funding, though crowdfunding portals will have their own charges.
In addition to taking legal advice as to the regulatory environment, it is therefore important businesses find the right crowdfunding portal.
There are also complications for private companies looking to make use of investment-based crowdfunding as they are, as a matter of general company law, prohibited from offering their shares to the public. However, there are ways available for those companies to work with the regulators to find a solution to this.
Crowdfunding looks as though it is here to stay but it is not suitable for every business or housing association. Professional advice should be obtained at the outset before attempting a crowdfunding, however it is intended to be structured.