Crowdfunding has raised more than £140 million for 300 businesses through online platform Syndicate Room – but the founder is warning that more has to be done to protect investors.
In recent weeks, the firm’s CEO and founder Goncalo de Vasconcelos says equity crowdfunding has had a turbulent time with a massive failure and tricks to encourage investors revealed.
The collapse of law firm Rebus, taking more than £800,000 of investor money down is the largest UK crowdfunding disaster and not a single penny of the investment is safeguarded by the Financial Services Compensation Scheme (FSCS).
But the meanest crowdfunding trick is revealed by former Sun newspaper editor Kelvin MacKenzie who was trying to raise funding for a new business on Crowdcube.
Crowdcube suggested what they termed a ‘neat trick’ to make his pitch look like funding was flowing in regularly.
The trick works like this, says MacKenzie, an entrepreneur raises £200,000 for a project but needs £800,000 to get the start up off the ground.
Crowdcube sets the funding at £1 million and then drip feeds the £200,000 the entrepreneur already has into the online platform so investors assume other people are putting money into the deal.
Vasconcelos argues that crowdfunding does not look after investors while companies can take money and then go into liquidation with impunity or while platforms and entrepreneurs collude to fool investors into parting with their cash.
Principles of crowdfunding
He suggests three principles for crowdfunding:
- All investors should have equal access to deals, as some professional investors are favoured by some platforms with closed pitches
- The amount invested should not matter – crowdfunding platforms and entrepreneurs should treat all investors with the same respect and offer them the same return for their money
- Urge entrepreneurs to offer transparent information about their pitch and the financial performance of the business
“I want the crowdfunding industry to embrace these ideals because this market will not work if investors do not make a profit or consider they are likely to lose their money,” said Vasconcelos.
“Investors also need to spend some time on due diligence – both on the investment platform and the company pitching for cash and only spend money on reputable platforms and deals offering fairness and transparency.”