LONDON (Reuters) - The fast-growing crowdfunding sector will be subject to tighter regulation to provide more transparency and protection for investors, Britain’s financial watchdog said on Thursday.
Crowdfunding allows individuals and small businesses to raise money from pools of investors who can put money into peer-to-peer lending schemes or securities such as unlisted shares.
Such fundraising is often hosted an online platforms such as Crowdcube, Funding Circle and Kickstarter.
Unlike more traditional private equity funds catering to wealthy individuals or institutions, ordinary people can gain exposure to growing companies by lending as little as 10 pounds, often without the fees accompanying equity funds.
Britain’s Financial Conduct Authority (FCA) said the new rules would provide greater transparency in loan-based crowdfunding - companies seeking funds would have to provide “fair, clear information” to allow investors to assess risk.
Firms running loan-based platforms would also be required to have provisions for loan repayments to continue, even if the platform itself falls into difficulty.
The regulations prevent investors who do not receive financial advice or have a financial background committing more than 10 percent of their investment portfolio to securities crowdfunding.
Sophisticated investors such as wealthy individuals with investment experience and private equity funds will be allowed a greater amount, the FCA said in a statement.
At present, there are no rules in place for loan-based crowdfunding, while there are some FCA guidelines for securities.
The crowdfunding sector is growing fast. British investors provided 480 million pounds ($803 million) in loans and bought 28 million pounds in unlisted securities in 2013, up 150 percent on the previous year.
The model has also taken off in the United States. This week U.S. crowdfunder Kickstarter said it had now raised $1 billion for projects since it began in 2009, with more than half of that being pledged in the past 12 months.
But despite crowdfunding’s soaring profile, some have voiced concerns over investor protection in the sector. The FCA launched a consultation last year, and the new rules will come into force from April.
“One of the biggest challenges we’ve come across is people saying, ‘Oh, you’re unregulated’, and that raises questions,” said James Meekings, co-founder of Funding Circle, a loan-based platform which hosts 20 million pounds a month in lending.
The FCA added it would introduce tougher capital requirements further down the line, since such investments are not subject to protection under the Financial Services Compensation Scheme. Platforms are already required to have a minimum capital base of 20,000 pounds.
“We want to ensure that consumers are appropriately protected but not prevented from investing,” said Christopher Woolard, director of policy, risk and research at the FCA.
Editing by Pravin Char