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FCA to crack down on equity crowdfunding companies

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05/02/2015
The Financial Conduct Authority has announced a crackdown on equity crowdfunding after finding that firms in the fast-growing sector were misleading investors about associated risks.

The FCA found that a significant number of crowdfunders were offering retail customers with little experience of investing “a misleading or unrealistically optimistic impression” of the opportunity. The FCA’s own research indicates that 62 per cent of investors in equity crowdfunding schemes have no prior experience of early-stage investment.

Last year, the FCA starkly warned investors that “it is very likely you will lose all your money” in equity crowdfunding (where investors take a stake in the company, rather than simply lend to the company); earlier this week, the Authority declared it would seek to regulate marketing of equity crowdfunders, noting that the opportunities were being mis-sold as ‘risk-free’ savings.

In its most recent announcement, the FCA notes that many equity crowdfunding firms failed to meet capital requirements last year, and others had misleadingly inferred that their products placed retail investors on an equal footing with venture capitalists. The Authority also criticised the industry as a whole for featuring a “lack of balance”, “insufficient, omitted or the cherry-picking of information” and “downplayed risk warnings” on their websites.

The FCA, however, stated it remained committed to promoting consumer investment in business and “innovative” financial technology resources, and has no intention of stifling the budding sector.

Industry reaction to the FCA’s announcement was generally positive.

Julia Groves, chair of the UK Crowdfunding Association, said it was an “absolutely welcome intervention to make sure that everyone is following the rules. There needs to be a level playing field.”

“The FCA’s review of the peer-to-peer lending industry and equity crowdfunding industry comes at an appropriate time,” said Christine Farnish, chair of the P2PFA. “The report is correct to highlight incidences where companies have misled customers and the FCA is right to take a tough line.”

Gonçalo de Vasconcelos, founder and CEO of SyndicateRoom, likewise welcomed the action. “It is crucial for investors and the reputation of the sector that those companies that have been misleading customers take immediate steps to improve their openness and honesty,” he said. “These shortfalls in the behaviour and practices of just a few of the platforms can hurt the standing a reputation of the whole zone.”

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