Entrepreneurs have raised around £1 billion to start or grow their businesses from crowdfunding in the past two years, according to a new study.
An analysis of the alternative finance market for businesses on both sides of the Atlantic revealed the cash raised by crowdfunding web sites doubled in 2012 and doubled again in 2013.
The research was compiled by Cambridge University in Britain and Berkeley in California, USA, writes specialist business web site seis.co.uk.
Although crowdfunding is expected to grow to offer £1.6 billion in funds by the end of 2014, regulators in the UK are stepping in to police the market.
The Financial Conduct Authority in Britain is worried that a lack of financial controls and a lack of understanding of investment risks by some individuals putting up money could lead to companies taking unfair advantage of cash donors.
Online pitch
Consultation is underway for an industry code of conduct that will be put in place from April 2014.
Crowdfunding generally involves an online pitch outlining a project by an entrepreneur wanting to raise a target fund to finance a business or project.
Investors pool their resources in a fund to pledge the cash. If the business fails to hit the target, then the money is returned to investors, says <name> of seis.co.uk.
Investment returns can vary from just a thank you from the entrepreneur to an equity stake in the business.
“The data proves that our sector is increasingly moving from alternative finance to mainstream ‘modern finance,” said Julia Groves, chair of trade body the UK Crowdfunding Association, told seis.co.uk.
“Crowdfunding is already providing real value in the provision of desperately needed capital in the engine room of the UK economy. With growing awareness and the advent of a new regulatory framework early next year the future looks extremely bright and the sector is primed to go on and completely replace aspects of retail banking,” she said.
Links with SEIS
The study showed £940 million was raised by crowdfunding organisations in 2013.
Researchers also reported more than 5,000 start ups and small businesses have pitched for crowdfunding over the past two years.
Crowdfunding is often paired with generous tax incentives offered by the government’s Seed Enterprise Investment Scheme (SEIS).
According to the site, “SEIS offers investors taking an equity stake in new start businesses significant tax breaks, including a reduction on income tax paid and capital gains tax exemptions on assets sold to raise cash for investments and on the sale of shares in a successful business after holding SEIS shares for three years.”
