Who’s Responsible for Greater Transparency in Equity Crowdfunding?

The latest review of the rules governing the crowdfunding sector has already come to its final stages. Moreover, it arrives at a crucial moment in the cycle, when many transactions are starting to settle and failures are becoming painfully clear.

Furthermore, a recent report by Beauhurst, a research firm, states that investment volumes have fallen down to 17% for the first time ever in the first half of this year. In situations like this, the FCA must be careful not to suppress the innovation that crowdfunding offers but still be cautious on it.

Value for money

It is very important that these platforms show investors that they are important, providing sufficient protection to investors is one way of showing it. Existing rules mostly depend on retail investors self-certifying their qualification to participate. However, the responsibility on platforms to ensure investors are provided with clear and strong investment information is somewhat nimble.

A much greater attention on transparency and disclosure is perhaps needed. Business investors’ information is very important that’s why platforms should handle it carefully and responsibly as well as clearly disclosing what due diligence has been done. Furthermore, ending any “smoke and mirrors” should be done, just like investments looking more attractive in the eyes of the crowdfunding community than what is real. An example is, by presenting a deal looking to be fully funded when the truth is that most of the funds have come from other, non-crowdfunded sources.

It is regrettable though that elevating the standards on crowdfunding platforms is hard to do due to the competitive landscape. Being ruled by a few major players, existing business models only gives a small opening to escalate the focus on transparency and more detailed due diligence without considerably raising costs.

But, there’s a possibility that the Treasury may simply decide that EIS and SEI (a tax-efficient scheme by the government aimed to encourage SME investment) are being violated and stop these kinds of incentives unless standards improve. And if that will happen, then it would cause a major knock-on effect on venture capital of all kinds, bringing an existential crisis for equity crowdfunding platforms. And about 96% of deals recorded on platforms qualify for EIS or SEIS, according to Radius Equity’s latest research.

Vote with their feet

Could investors find a solution by themselves? Well, they have to decide on the matter and ultimately, investors will vote with their feet. Either they will draw out of the market, or they will admit the need to start paying more for a better quality service.

In SME investing, the middleman of a transaction must possess a great amount of expertise and hard work. Meaning, carrying out thorough due diligence pre-investment to make sure that business models are comprehensive, that the management team has got what it takes to drive growth and that convincing exit plans are in place. It also means a post-deal of ongoing lapses and management of the investment if the guaranteed returns are to be delivered. This is the kind of system that an institutional private equity investor is looking for as well as private investors.

The FCA must carefully balance the situation, not to harass an industry who plays a significant role in providing funding for small, growth businesses, while also protecting the interests of the entities who want to back them.

But then again, a change is a must for the crowdfunding industry for it not to collapse because it would be a great shame for businesses, investors and the economy as a whole if it happens. The necessary actions that the FCA might take to tighten its regulatory stance are yet to be seen, nonetheless, investors could also have an important role to play as key drivers of change.