Crowdfunding new regulations anger start-up industry

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BBC News | March 6, 2014

Crowdfunding UKEntrepreneurs say new rules from the UK regulator will "take the crowd out of crowdfunding".

The policies on crowdfunding, which come into force next month, have been drawn up by the Financial Conduct Authority (FCA) .

Crowdfunding taps into ordinary consumers who want to buy equity, or a stake, in a new start-up.

Many are hosted through a website platform such as Kickstarter, Indiegogo or RocketHub.

Investors and lenders often get rewards, linked to the amount they have pledged - such as badges, T-shirts, tickets, or whatever is being funded - as a thank-you for their support.

The FCA is now proposing that inexperienced investors will have to certify that they will not invest more than 10% of their portfolio in unlisted businesses.

Firms that run the website platforms say the rules are too tight and will put off potential investors.

Barry James, founder of The Crowdfunding Centre, says: "Make no mistake, the infamous 10% rule - however it's dressed up - does just that: it takes the crowd out of equity crowdfunding."

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Some of the new regulations cover peer-to-peer lending - a method by which individuals simply lend to an entrepreneur, again often through a website platform.

The FCA sees these as less risky, so the rules are less stringent, and many in the industry have welcomed them.

Samir Desai, chief executive and co-founder of Funding Circle peer-to-peer lending platform, told the BBC: "There are simple things [in the regulations] like keeping the company's money separate from the customer's money.

"It's putting in place sensible operating principles that you would expect in any financial service company."

Founder of peer-to-peer lending platform Funding Circle James Meekings: "This industry has to be regulated"

Striking a balance

Speaking to the BBC's Today programme, Chris Woolard, director of Policy, Risk and Research at the FCA, said: "We're trying to strike a balance between on one hand making sure consumers are properly informed and have real clarity about the investments they are getting into, but on the other hand, making sure this... source of funding is open to businesses and individuals."

The FCA also proposes that crowdfunding platforms should be clearly presented and understandable, and not downplay risks. They should have resolution plans in place, mapping out what happens if the business goes under.

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