Comment: Crowdfunding goes mainstream

Biodiversity attraction the Eden Project in Cornwall has raised millions via crowdfunding. Picture: Getty

There was a time, not too long ago, when you had to start an article such as this one with an explanation of crowdfunding. The very fact that is no longer the case speaks volumes. In its early days, crowdfunding was seen as quirky. You might get a CD or a free T-shirt out of it, but it wasn’t serious business.

Following the financial crisis, it slowly became a niche way for small businesses to obtain finance – filling the gap the banks had left. The numbers were small, that’s probably why there weren’t too many corporate lawyers or other professional advisers shouting its merits from the rooftops.

However, the potential was clearly there and we stuck with it. Although still used for small beer, pun intended, things have moved on apace. Now alternative finance – the catch-all for crowdfunding and other funding hybrids – has hit the mainstream and might even have started to wear a shirt  and tie.

Crowdfunding is now being used by ever-larger organisations with various multi-million pound deals having taken place in 2014. The average amount raised through equity crowdfunding campaigns in the UK in 2014 was around £200,000 and that figure is only going to rise.

Crowdlending is quickly joining crowdfunding in the lexicon. An example is Crowdcube, the leading equity crowdfunding platform, now offering mini-bonds which allow investors to lend money to more established brands over a set period for regular interest repayments.

The Eden Project and River Cottage have already taken advantage of this to raise millions. Their success, and willingness to choose this route, is encouraging more businesses to do likewise.

A report by NESTA and the University of Cambridge predicted the UK alternative finance market will be worth £4.4 billion by the end of 2015. That’s a figure that makes everyone sit up and take note.

This Wednesday, we’re co-hosting an event with Crowdcube in our Glasgow office, attended only by businesses seriously considering a crowdfunding campaign. Such is the demand for the inside track on alternative finance we were inundated with applications, thought given that Crowdcube alone has raised more than £73 million from 155,000 signed up investors that’s no surprise.

For some time, there has been talk among the industry that banks were going to realise the potential of alternative finance for small businesses – customers who need options when the first answer is no. Then in early 2015, we saw RBS team up with peer-to-peer lending platforms Assetz Capital and Funding Circle.

Increasingly, we are going to see investment deals in which alternative finance forms part of a mix of funding from multiple sources. I even expect investment brokers and hedge funds to start taking an interest as the growth increases and we begin to see some exits by the first crowdfunded businesses.

So what does all this mean for lawyers? As the numbers involved in alternative finance grow, so do the opportunities for professional advisers, including accountants, tax advisers and more.

At Harper Macleod, we established ourselves as leading advisers in relation to crowdfunding by being among the pioneers and assisting clients to get crowdfunds over the line. This experience has been crucial. As with all areas you need to understand the particular challenges it can pose to your clients – and crowdfunding has some unique characteristics.

If you have clients who are seeking funding, and have a business which lends itself to alternative finance, it has to be something for them to consider.

As interest in crowdfunding rises, so too does the level of regulation imposed upon the platforms to ensure that the correct levels of protection are in place in relation to financial promotion to the public. At present this does not seem to be hindering the number of platforms establishing themselves in the UK.

It is probable that at some point in the future we are going to see a failure. Sceptics will no doubt be ready to pounce but in truth it will be further evidence that the market is maturing. Failures occur in every industry, and how the industry responds will be the crucial factor.

I strongly doubt that it would deter the increasing number of investors looking at alternative finance. Instead, we are likely to see more niche platforms being established with a specific focus of the types of business on the platform. Alternative finance is here to stay, and the next few years will be interesting for everyone involved in the crowd.

• Paula Skinner is a Partner at Harper Macleod, www.harpermacleod.co.uk