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FSA gives green light to ‘crowdfunding’

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2:35PM GMT 04 Feb 2013

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The Financial Services Authority has for the first time approved a website which allows members of the public to take direct equity stakes in small unlisted businesses.

Investors using Crowdcube, an online “crowdfunding” platform, will now be able to claim compensation from the Financial Services Compensation Scheme and access the Financial Ombudsman Service if they have a complaint.

Luke Lang, co founder of Exeter-based Crowdcube, said FSA approval was “crucial” for inspiring confidence among investors and small companies using the service.

“When we talk about taking crowdfunding mainstream, it is crucial that people have that confidence of the additional protection they’ll get as a result.”

Crowdcube has helped 36 small businesses raise a combined £5m since it was founded two years ago.

Consumers can back small businesses by buying stakes with as little as £10.

Massolution, a firm specialising in the sector, says more than £1bn was raised globally through crowdfunding in 2011.

However, much of that came through start-ups which did not sell any equity. Through sites such as Kickstarter, companies looking to raise finance can instead give away ‘rewards’ and discounts in return for money to help them get their project off the ground.

James King, managing director of FIG – which helps young entrepreneurs raise finance – argues that selling small portions of equity to a large group through crowdfunding is “wholly inappropriate for both investor and start-up in nearly every instance”.

“It effectively tries to create a public market without the essential controls that come along with listing on a stock exchange.”

Last year, the FSA said selling crowdfunding should only “be targeted at sophisticated investors who know how to value a start-up business, understand the risks involved and that investors could lose all of their money”.

It also warned that investors’ shares will be difficult to sell, will produce few dividends and that investments will be diluted when more shares are issued — when a company raises its next round of investment, for example.

For small businesses, selling shares through crowdfunding remains a very niche activity, but it is an option that is growing in popularity.

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