Since the very first crowdfunded project (a 1996 US tour by the prog rockers Marillion, believe it or not), crowdfunding has grown in popularity and morphed into a number of different forms. But it essentially retains the same core principles: offering a large number of people the chance to invest small amounts in projects they are passionate about with no barriers to entry. And for a growing number of companies, crowdfunding offers a relatively low-cost way of securing finance.
There are two main types of crowdfunding: P2P lending and equity platforms.
The peer-to-peer lending platforms work by allowing investors to finance loans to SMEs at fixed rates of return. Funding Circle, Ratesetter and Zopa lead the way there (with Funding Circle even receiving government backing for investment in small firms). These platforms are principally aimed at attracting people with money to connect with established businesses with revenues strong enough to pay back a loan. Crucially, the P2P market is relatively tightly regulated by the FCA.
Then there are the equity crowdfunders that allow businesses to sell shares to investors. Crowdcube and Seedrs are probably the best known in this space. These platforms have evolved from niche players to genuine aggregators of alternative finance. Everything from tech firms, fashion brands, an artisan bakery and a private members’ club in Soho have all used Crowdcube to access seed capital. For a business looking to secure investment via crowdfunding, there are some hoops to jump through. Most platforms insist investee companies complete an application and meet minimum disclosure requirements on their track record, their people and their strategy. In practice, that means hopeful companies must provide a business plan, with the usual content you’d expect, plus financial projections, topped off by a video pitch for investors to watch.
As the sophistication of crowdfunding has grown, so a thriving industry of support services has emerged. There are agencies that specialize in business plans and video experts that can help you hone your pitch. A few key takeaways:
- It has to be said that crowdfunding is still a tiny part of the finance mix in the UK for start-up projects and businesses. The amounts raised (less than £100m) really are a drop in the bucket.
- However, it is growing. And most of the noise and activity is in investment crowdfunding – lending and P2P lenders. The fastest growth at the moment is in niche platforms – specializing in certain types of companies/projects like tech, renewables, etc.
- The FCA is doing its best to keep the crowd in crowdfunding but its efforts will inevitably limit the number of people able to invest. At the same time, the growth of social impact investing is giving people a chance to put their money into projects they believe have a beneficial impact on communities, etc.
- All the platforms are all trying to differentiate themselves – some help you put proposals together, others are discounting fees, others promising more focused and pre-selected investors instead of a big crowd.
Companies can also benefit from the Seed Enterprise Investment Scheme (SEIS), which aims to boost investment in small startups by offering income tax relief on the shares bought through crowdfunding websites. HMRC rules state that any company looking to attract investors interested in EIS/SEIS relief must apply for certification of their eligibility.
If the application is successful, HMRC will issue a letter and compliance certificates (form EIS3) to give to investors.
“The letter will include a unique investment reference number,” HMRC says. “You must include this on the compliance certificates you give to investors. Investors need the compliance certificate and reference number to be able to claim tax relief.”
In addition, investors have to hold the shares for at least three years to qualify, but if they sell the shares in a SEIS-qualifying company after three years, any returns are free from capital gains tax.
If you feel your business would benefit from seeking investment via the crowd, get in touch and we can help.