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EARLY-STAGE businesses often struggle to secure cost-effective funding and it can be tempting to look to alternative solutions, such as crowd funding.
“While crowdfunding may not follow the traditional financing route, it is still a regulated activity and requires sound knowledge of the rules and risks involved,” says Anna Horrell pictured, a commercial solicitor with Borneo Martell Turner Coulston.
What is crowdfunding?
Crowdfunding is a route open to businesses to raise money from the public. It is usually for a specific project, product or purpose, and the project is pitched to the public through specific crowdfunding websites.
Types of crowdfunding
There are four main types of crowdfunding:
- Donation-based crowdfunding, which allows supporters and members of the public to donate money to the business.
- Pre-payment-based crowdfunding, which relies on consumers lending money in return for some tangible rewards.
- Loan-based crowdfunding, where consumers will lend money to the business in return for interest payments and repayment of capital over time.
- Investment-based crowdfunding, where members of the public will invest in the business through the issuance of shares or other instruments that are similar to bonds.
Legal issues to consider
The rules and legalities you will need to follow will depend upon the type of crowdfunding you pursue. The investment and peer-to-peer lending campaigns are regulated by the Financial Conduct Authority and their rules and requirements need to be adhered to.
The UK Crowdfunding Association, which was set up as a self-regulatory trade body with its own code of conduct, also recommends steps that need to be taken to protect the investors.
You are likely to need to seek legal advice on:
- contracts, including any you enter with crowdfunding consultants;
- how (if at all) the Payment Service Regulations 2017 may apply;
- intellectual property rights; and
- data processing protocols and compliance.
How we can help
For an informal discussion, please contact Anna Horrell in the commercial team on 01604 622101 or email
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
