Raising capital: Crowdfunding

Crowdfunding is a new phenomena for businesses to raise capital by selling their equity to a large number of individuals, typically over the internet. Crowdfunding is also used for raising funds for individual projects or campaigns. The practice of Crowdfunding is popular in the USA and is now beginning to gain momentum in the UK.

There are a number of platforms for individuals looking to raise capital through crowdfunding, including dedicated websites. It is understandable why crowdfunding is attractive for businesses, especially in the current economic climate and the decline of ‘typical’ funding methods.

Caution For Businesses

It is important for businesses looking to obtain investment through this method to read the terms and conditions carefully before signing up to the crowdfunding sites. Businesses should particularly consider how their intellectual property rights are treated and the amount of commission taken by the crowdfunding platform. Typically capital is raised on an ‘all or nothing’ basis and ‘investors’ generally obtain shares in the business.

The legal consequences of selling the equity in your business should not be forgotten due to the relative ease of crowdfunding. It is advisable for all businesses to take specialist advice before signing up for crowdfunding.

Finally, you should consider protecting your intellectual property rights, either in relation to your business or the specific project you intend to launch on the crowdfunding platform. Remember that you risk any unprotected intellectual property rights as soon as you make your idea public.

Caution For Investors

Crowdfunding platforms are for the most part not regulated and The Financial Conduct Authority (FCA) have specifically outlined their concerns about crowdfunding on their website. “Abundance”, a crowdfunding platform for energy projects and “Seedrs”, a crowdfunding platform for start-up business, have become regulated by the FCA and therefore any complaints regarding their services can be made to the Financial Ombudsman Service.

Investors should be cautious before investing on crowdfunding. You should research the project, business and sector as thoroughly as possible and carry out as much due diligence as possible because of an increased risk of fraud.

We cannot advise on investment routes, but we can review any agreements and advise you on the arrangements and consequences of the same.

For more information contact us…

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