Crowdfunding

Crowdfunding is one way that individuals, charities and businesses (including start-ups) can raise money from the public to support a project, campaign or person.

There are several types of crowdfunding that are regulated in different ways.

We regulate:

• loan-based crowdfunding: also known as ‘peer-to-peer lending’, consumers lend money to businesses in return for interest payments and a repayment of capital over time
• investment-based crowdfunding: consumers invest directly or indirectly in businesses by buying investments such as shares or debentures, which act like bonds

These are regulated activities under the Financial Services and Markets Act 2000.

We also regulate payment services provided in connection with:

• donation-based crowdfunding: consumers give money to enterprises or organisations they want to support
• pre-payment or rewards-based crowdfunding: consumers give money in return for a reward, service or product (such as concert tickets, an innovative product, or a computer game)

How crowdfunding works

Crowdfunding usually takes place on a website platform that allows businesses or individuals to raise money, and investors to provide that money. 

The business or individual often explains their project in a pitch to attract loans or investment from as many people as possible.

Benefits of crowdfunding

Crowdfunding can be a useful way for organisations or individuals to access finance that banks or other lenders are not prepared to offer, or only offer at a high cost. 

Consumers may also find it rewarding to be involved in a business or project as it develops, or to support a local initiative or other individuals. 

Crowdfunding platforms may offer higher returns than those available from other financial products, however there are usually greater risks. 

Risks of crowdfunding

Different platforms and loans carry different levels of risk. Find out more information about high risk investments and the important questions to ask yourself before you invest.

Loan-based crowdfunding

Consumers who invest via loan-based crowdfunding platforms need to be aware that:

• you won’t have access to the Financial Services Compensation Scheme[1] (FSCS)
• although some platforms have a way of cashing in your investment (a secondary market), you may not always be able to cash it in quickly or for as much money as you paid - you may get back less than what you put in
• it is higher risk than holding money in a savings account
• you may lose some or all of the money that you invest

Investment-based crowdfunding

Due to the potential for losses, we regard investment-based crowdfunding as a high-risk investment activity. 

As well as the risks associated with loan-based crowdfunding, for investment-based crowdfunding it is very likely that you will lose all your money. 

• Most investments are in shares or debt securities in start-up companies and will often result in a 100% loss of capital as most start-up businesses fail.
• You will not be repaid and/or dividends will not be paid if the company you invest in fails or there is a fraud.
• If you hold shares in a business or project, it is unlikely that income in the form of dividends will be paid. The value of your investment may be diluted if more shares are issued, and this is likely as many start-up businesses undergo multiple rounds of funding.
• You should be prepared to wait for a return on your investment, as even successful start-up businesses tend to take time to generate income.
• If firms do handle clients’ money without our permission or authorisation, there will be no protection for investors in place. This is a particular risk if a platform fails and becomes insolvent.
• Most platforms do not have a way you can cash in your investment (a secondary market).

For debt security crowdfunding, it is likely that you will lose some or all your money. Most debt securities on offer are issued by start-up companies and can result in capital loss if the businesses fail.

• Your money will not be repaid and/or expected coupon payments will not be paid if the company you invest in fails or there is fraud.
• The company can become more likely to fail over time, increasing the risk of the investment.
• If firms do handle clients’ money without our permission or authorisation, there won’t be protection for investors. This is a particular risk if a platform fails and becomes insolvent.
• Securities offered on such platforms are not usually traded on a secondary market and most are not transferable. This means you may be unable to cash in your investment. You should be prepared to hold any securities you buy until maturity.

How to protect yourself

Before investing, make sure you understand:

• what due diligence has been performed (the checks made on the business or person looking for funding)
• the level of risk (and that you’re happy with this level of risk)
• the value for money offered by an investment (after charges, taxes and allowance for defaults)

You should only invest money you can afford to lose.

Find out more about how to protect yourself against scam[2]s. Or, if you think you have been scammed, find out how to report it[3].

Our view on crowdfunding

We believe that consumers looking to invest in crowdfunding offers should take care. 

Given the typical risks involved, under our regulations, firms are only allowed to promote crowdfunding offers to certain investors. These include experienced or sophisticated investors, or ordinary investors who confirm that they will not invest more than 10% of their net investable assets. 

Find out more about our crowdfunding policy, and how you can protect yourself, in our policy statements on crowdfunding: 

• PS19/14: Loan-based (peer-to-peer) and investment-based crowdfunding platforms: Feedback to CP18/20 and final rules[4]
• PS14/4: The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other media[5]