In terms of businesses, anyone with a UK-based limited company can apply for funding on Crowdcube or Seedrs.
Other platforms vary and there are some different rules for different types of crowdfunding and investors/businesses but overall it is a much easier process to set in motion and run than more traditional forms of investment.
Equity-based crowdfunding is a particularly risky proposition for investors – with two in every three start-ups going bust, and few businesses successful enough to eventually be sold, the chances of individuals getting their money back are uncertain at best.
Investment Sizing
Crowdcube will facilitate investments of between £10,000 with no upper limit; As per above, other platforms vary, you can check out our list of crowdfunding platforms below for further details. Be aware the total amount you get will be affected by the fee structure for any crowdfunding platform you use, they typically will take a percentage of the total you raise or an upfront fee, sometimes both.
Campaign Preparation
Be prepared to have lots of individuals believing they have to right to offer advice to – and get involved in – your business, and at the very least expect regular updates in return for their £10 investment, loan or pre-sale. Be careful about making you and your business too accessible to them in the early days – it may be charming at first but will quickly become irritating and hard work.
Do your homework. Look at how much other businesses have raised – and for what – using crowd funding, and pitch your proposition accordingly. The materials you provide to an equity crowdfunding investor should be accessible, professional, and detailed. You do not want to have reason to say after the fact “I should have made time to make it shorter”. Make sure that you maintain timely and high-quality interactions with everyone before, during and after your raise. If you have a pig, don’t put too much lipstick on it. Be honest about where you are. Embellishment will be sniffed out early.
Platform Rules and Guidelines
Beyond pure regulation, you should also be very clear on the rules of any platform your considering as an investor or business raising funding. Take for example a key rule Crowdcube enforces, whereby start-ups seeking money have to secure investor backing for the full amount asked for by the deadline to get the money. If they only manage to get pledges for some of that amount, they won’t get any of it at all.
The reasoning behind this is investors are investing their money on the assumption that the entrepreneur will be able to use the total investment specified to grow their venture – if they don’t actually get much of the money, that makes the prospects for the business a very different proposition.
Crowdfunding Regulations
The Financial Conduct Authority (FCA), the regulator responsible for all financial securities and investment products, now largely regulates crowdfunding. A few years back crowdfunding was been broadly unregulated, with most of the major platforms signing up to voluntary codes of conduct instead.
The introduction of FCA regulation in recent years for crowdfunding platforms has been a mixed blessing, on one hand making crowdfunding safer and therefore attracting new investors who were previously discouraged by the risks. On the other hand, the feeling amongst startups is mixed, with some believing regulation has been restrictive and is discouraging investment.
Whatever you believe in terms of regulation, most of the major platforms are already members of the UK Crowdfunding Association (UKCFA), where their voluntary code of conduct is similar in principle to what the regulation requires (take a look at this). They also believe it will encourage smaller firms to either adhere to the same professional standards or exit the market. It’s worth taking a further look at FCA regulations, the UKCFA code and other laws in relation to crowdfunding prior to getting into a campaign.
