If you are the type of investor who will give away some cash to a new start business in return for a T-shirt or a mention on a web site, then crowd funding may be for you.
But the UK’s financial regulator is worried that thousands of investors are caught up in the crowd funding craze and do not realise they are taking a gamble with their money and could lose the lot.
Most crowdfunding is carried out online through unregulated web sites – and most of them are outside the UK and beyond the reaches of the courts.
If the deal goes wrong, investors have little or no recourse to compensation.
The Financial Conduct Authority (FCA) is worried to many unsophisticated investors are giving away their cash without understanding how to value a business.
Stallone wants money
One example is an appeal by Hollywood actor Sylvester Stallone for crowdfunders to put together $250,000 to help him to finish shooting his latest movie after a backer dropped out.
A $2,000 donation buys a visit to the set during the shoot and $10,000 gives the investor the right to pen a song for the movie.
So far, the appeal has raised $8,000.
The issue for an investor would be why the backer dropped out and what the return on $2,000 invested in a pension, another equity deal or even in the bank might be.
A more experienced investor might also ask why Stallone doesn’t just stump up the cash himself, as he must be worth much more – and the fact that he isn’t may suggest he doubts the commercial success of the film would give him a return on his money.
No protection
The FCA web site says: “We believe most crowdfunding should be targeted at investors who know how to value a start-up business, and who appreciate the risks involved and that they could lose all of their money.
“We want it to be clear that investors in the majority of crowdfunds have little or no protection if the business or project fails.”
Only one British crowdfunding platform is regulated, so investors have no safeguards for their cash elsewhere.
The FCA wants to regulate the sector by April 2014 to protect investors caught up in the craze who do not have the financial acumen to spot a poor deal.
Crowdfunding platforms typically pitch to a pool of investors for small amounts to make a cash target for a project – if the target is not reached, then any pledged cash is returned to the investor.
