Run with the crowd, away from the bank

Ghost deer unveiled as World's strongest fermented beer, served through a taxidermy bar tap. Picture: Ian Georgeson
Ghost deer unveiled as World's strongest fermented beer, served through a taxidermy bar tap. Picture: Ian Georgeson
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IN THE eight years since video blogger Michael Sullivan coined the term, crowdfunding has gone from zero to hero, taking centre stage in the emerging alternative finance sector.

Growth has been helped by the fact that the banking sector has been largely sidelined as it struggles with self-inflicted ills.

However, the growing popularity of crowdfunding – raising money from a large number of individuals – has caught the eye of those worried that it may present a minefield for the unwary investor, essentially an individual who is often untrained and inexperienced. Last week the regulators announced new rules to protect those parting with their cash.

Paula Skinner, a partner specialising in start-up investment at Harper Macleod, says the bank loan impasse has left a gap in Scotland for companies looking to raise £150,000 or less. Here and elsewhere around the world, that gap is being filled by the likes of crowdfunding and peer-to-peer lending.

“It is just such an exciting space to watch,” Skinner says. “Done properly, with the right amount of caution, it can be good not only from the money side of things, but also for raising the profile of the business and its products.”

The bad boys of Scottish craft beer, Aberdeenshire’s BrewDog, have certainly mastered that trick. The makers of Hardcore IPA and Libertine Black Ale recently closed out the third round of their “Equity for Punks” scheme, having reached the target of £4.25 million a month ahead of deadline. The company has now raised a total of £7m from 14,691 “fanvestors” who are entitled to an array of discounts and other concessions.

These enthusiastic shareholders have become an unofficial marketing network for BrewDog, one of the intangible benefits of crowdfunding. A squad of them even took to the streets last summer to follow an Equity for Punks tank driven through London in a bid to advertise the fundraising.

Closing out the latest round, BrewDog co-founder James Watt declared a new world order in business finance. “The mental shackles that have tied down British small and medium-sized businesses to the staid and unimaginative traditional methods of raising funds have been untethered,” he said.

“We have ushered in a brave new world, and you can expect to see more businesses launching similar schemes in 2014. Crowdfunding is no longer just a fad or buzzword, it is a legitimate alternative financial system.”

All very rock ’n’ roll, but also backed up by the figures. A total of £28m was raised in the UK through equity crowdfunding in 2013, and statistics released last week by The Crowdfunding Centre show the pace is accelerating.

More than 2,600 equity and reward projects have been launched so far this year in the UK, raising some £1,700 per hour for total pledges of more than £5.7m. This doesn’t include peer-to-peer lending – where investors make loans rather than buying equity – which last year raised a further £480m, up 150 per cent on 2012. Despite this growth, it remains a market in its infancy which will evolve as it moves towards its prime. The first signs of this came last week when the Financial Conduct Authority (FCA) announced new measures for the oversight of online markets for loans and equity funding.

Designed to protect consumers, the move by the FCA also gave implicit backing to these platforms as legitimate forums for raising money. However, some within the industry are concerned that the new policies, which come into force next month, will limit the average person’s ability to invest.

Barry James, founder of The Crowdfunding Centre, is particularly worried about the so-called 10 per cent rule.

From 1 April, buying shares in companies who raise funds on sites such as Crowdcube will be restricted to savers advised by professionals, those linked to corporate finance or venture capital firms, or those certified as sophisticated or high net worth investors. All others will have to verify that they will spend no more than 10 per cent of their assets – excluding homes and pensions – on crowdfunding in any single year.

“It will take the very people crowdfunding was meant to attract out of the equation,” James says. “All you have to do is look at what France or New Zealand is doing. They realise that opening this up, and making it easy, is a good thing.”

The French government relaxed its rules last month, saying that ventures could raise up to ¤1m per year without notifying authorities. New Zealand has followed a similar line in loosening governance and disclosure requirements.

Derek Bond, managing director of Glasgow-based crowdfunding platform Squareknot, worries that investors forking out small amounts of money will be put off by the self-certification process. “Whilst we appreciate that an exemption based on size alone does not take into account the relative value of money, depending on the investor’s net assets, we believe it would be useful to create an additional exempt category based on a low threshold, such as investors certifying they will not invest more than £1,000 in unlisted shares in the following 12 month period,” Bond says. “This would enable everyone to participate in crowdfunding without having to complete a self-certification process.”

Others, however, have welcomed the changes. Last week, Crowdcube co-founder Luke Laing noted that the measures finalised by the FCA were already in line with how his platform operates. “The good crowdfunding platforms out there already conform to a lot of these rules,” Harper Macleod’s Skinner says, “so they won’t have to make a whole lot of changes in a short period of time.” «

Twitter: @KristyDorsey