Crowdfunding for Dummies

14th August 2012

Participants can often chip in both small (as little as £10)  and large sums (the sky's the limit) – with many schemes offering investors the chance to spread their money across several companies.

But investors need to be careful, a new warning from the Financial Services Authority states. While it is easy to put your money in, it may be far more problematic to exit the target company.

Investors and businesses meet online

Crowdfunding in the UK is still small. And while it can be a great way for investors and entrepreneurs to meet each other, there are drawbacks.  These can range from a company failing to live up to its promise to crowd-sourcers who simply take the money and run.

The FSA says it is not warning against crowd sourcing which can offer rewards far in excess of conventional assets.  But it suggests that this is for more sophisticated investors who are aware of the pitfalls as well as the potential profits – and who can afford to lose some or all of their money. Crowdfunding is unregulated so there is no compensation fund although that does not prevent participants suing promoters.

Investors should be cautious – most crowdsourcing schemes are open for some time so there is no need for haste. Here's some basic questions.

These questions apply to almost all investments in start-ups and small businesses – but with the nature of online investment can persuade people to make spur of the moment decisions.

Not for the novice

The FSA says: "We believe most crowdfunding should 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. We want it to be clear that investors in a crowdfund have little or no protection if the business or project fails, and that they will probably lose all their investment if it does."

Seedrs, an online platform joining those with money to invest with those who need capital for their project promises to "raise capital for your startup from friends, family and the crowds." It is one of the comparatively few platforms authorised by the regulator.

Chief executive Jeff Lynn welcomes the FSA statement. He says: "This is a welcome contribution to the information that's available: all of the risks they highlight are the same ones that we emphasise strongly when investors use our platform, and we agree entirely with their statement that this type of investing can make sense for investors who understand the risks as part of a diversified

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