Infant Industry's Regulatory Teething Probelms

infancy regulation

Most people would agree that crowdfunding is in its infancy. Certainly, the industry’s collective vocabulary has yet to emerge from the kindergarten. The terms of this fast-expanding, much talked-about area are all over the place. Which must mean that it’s tricky to pin down in any meaningful sense – how do you regulate something if you’re not even sure what you’re talking about?

So the first question has to be this: What is crowdfunding, anyway? 

How about this? Maybe it includes those irritating, round-robin emails that often start: “I must be mad, but I’m running backwards up Kilimanjaro, dressed as a giant sardine. But it’s all for a good cause: the kumquat-eating, Lithuanian fruit bat is an endangered species…” Or some such.

Instinct says, this must be wrong. Mass begging, albeit for charity, is hardly crowdfunding. At least, not as we know it.

Then again, the concept hardly gains in nobility when one considers the unedifying prospect of the fancy racing company, Caterham, seeking funds to continue the very expensive business of racing implausibly overtuned, unnecessarily powerful cars by soliciting money from the gullible masses.

“The crowd-funding initiative offered rewards to investors ranging from Caterham-branded earplugs and caps through to used race suits and carbon engine covers,” reported the BBC recently.

 Peer-to-peer - the "bourgeois sham of equlity before the law"?

You may notice that the spelling of the word itself is not even settled. The BBC’s style guide favours “crowd-funding”, whereas the vulgar masses, such as ourselves, tend to run with the unhyphenated “crowdfunding”.

Semantic quibbles aside, the latest news from the Beeb offers little hope for the workers involved in this elitist farrago. Small wonder crowdfunding has a bad name in some quarters.

Recent events in the regulatory environment have offered some solace, however. It's becoming clear from the provisional sets of permissions issued by the Financial Conduct Authority that crowdfunding in the meaningful, financial and investment sense that we address on this site, is a term to be applied primarily to the raising of equity.

An equity raise is typically something done at ground level – for companies yet to trade. The crowd’s good intentions and open purses are sought for the purpose of getting in to the game. Investors need to have an appetite for risk and an awareness of the consequences of committing money – a stronger probability (we feel this rather than assert it with conviction – the data sets are not yet conclusive) of financial loss rather than gain.

The more conservative area of crowdfunding looks destined to lose its right to the name. The peer-to-peer loan industry has its own terminological tussles. Some argue – with considerable intellectual weight, in our view – that the loan of money by an individual to a business is hardly “peer-to-peer”, even if both parties are single, legal entities with the same rights in court. The idea of Apple Corp. having the "same" rights in court as the writer of this article, though, is undoubtedly the kind of thing that Engels would have considered to fall well within his concept (espoused in Anti-Duhring) of “the bourgeois sham of equality before the law”. To put it another way, rich people have the best money lawyers can buy...

Perhaps a better characterisation of individuals making loans to commercial enterprises is person-to-business (P2B) lending. This may become crowdfunding in a purer form as the market develops. P2P loans could reasonably be said to be such if the platform that acts as a conduit has a business on the borrowing side and a family office, a hedge fund, or an institution as a lender.

These activities need different regimes - P2PFA

Peer-to-Peer Lending and CrowdFunding, Christine Farnish, Chair of the Peer-to-Peer Financial Association (P2PFA) recently welcomed the consultation process in robust terms: “It is good to see that the FCA recognises the important differences between peer-to-peer lending, which provides term loans to consumers and small businesses, and equity type investing via crowd funding platforms. These activities are like apples and pears and present very different risks to consumers whose money is being handed over. They need different regimes.

“The P2PFA will be responding fully to the consultation and will continue to engage openly with the FCA as the new regime is developed.”

So just as it emerges and matures, sections of the crowdfunding market will cease to be crowdfunding – certainly the draft FCA permissions for P2p/P2B are very different for those required for crowdfunded equity raises.

Crowdfunding is dead. Long live crowdfunding.

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