The regulator has a problem that deserves some sympathy: our previous political masters in the reigns of Gordon Brown and David Cameron — if not the present lot — were clear that they wanted to encourage wealth creation and to establish new mechanisms whereby more start-ups and small firms could get funding.
They wanted crowdfunding to be allowed to put down roots. On the other hand, the FCA’s mandate is not to save the world but it is to prevent investors getting fleeced.
The compromise that was struck was for the regulator to avoid heavy-handed intervention while the crowdfunders established themselves.
This has worked but it now clearly thinks they have had long enough and it is time to grow up.
The good news is each of the three major platforms Seedrs, Crowdcube and SyndicateRoom has mobilised a core of investors which is bigger than the entire heavenly choir of angel investors that existed before they started operating.
They have made it possible for individuals to invest small sums of risk capital across a range of start-ups in a way which was not possible before and which is essential in the long-term if we are to foster an equity culture.
At the same time, they have financed a lot of firms which might not otherwise have got backing at a price they could afford.
No one should doubt that this is a remarkable outcome, the more so because it has been achieved with some failures certainly, but with no seriously embarrassing disasters.
So the crowdfunders have come a long way, but now they have to do more. In a report in December, the FCA warned that it was difficult for investors to compare platforms with each other or with alternative investments because what was on offer was often complex and unclear.
It warned that investors might find it difficult to assess the risks and returns of different investments, or pick up conflicts of interest, because of the variety of ways basic information has been presented. Much greater comparability and transparency was called for.
The crowdfunders agree with this — up to a point. There is a willingness to standardise but they also want to keep their differences because with these come competitive advantages.
It matters, too, that providing masses of information and verifying it as accurate — as desirable as they may be — is a costly exercise. This is a problem because part of the crowdfunders’ appeal lies in their cheapness to users.
It therefore remains an open question whether the crowdfunders will go far enough to satisfy the FCA and this, therefore, opens the door to an interesting compromise solution suggested by old City hand Stephen Hazell-Smith.
He suggests all the offerings should be displayed in a broadly standardised way not only on their own platform but also on a website he chairs, businessagent.com.
This would immediately improve transparency and make it easier for investors to make informed decisions. More to the point, it would put in place one of the basic building blocks of a wider market infrastructure and ecosystem the crowdfunders will need to support them as they grow.
It may not be something they like now, but such co-operation might be the price they have to pay to keep the regulator on side and ensure their long-term survival. And it is important in this context — and with the political mood beginning to damp — that they do survive.
*From Peer 2Here: How New-model Finance is Changing the Game for Small Businesses, Investors and Regulators by Andy Davis.
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