According to the Financial Services Authority (FSA) inexperienced investors should avoid crowdfunding investment schemes, as they could be in danger of losing all their money.
The regulator has claimed that crowdfunding internet sites that allow start-ups and small companies to raise funds in return for small equity stakes, should “be targeted at sophisticated investors who know how to value a start-up business (and) understand the risks involved.”
“Many crowdfunding opportunities are high risk and complex” the FSA said. “We believe most crowdfunding should be targeted at sophisticated investors, who know how to value a start-up business, understand the risks involved and that investors could lose all of their money.”
The FSA added that some crowdfunding firms may be handling both clients’ and investors’ money without authorisation and thus not properly protecting the latter.
The implications of this were demonstrated by the collapse of MF Global last year, which revealed the broker had improperly mixed client funds with its own money, leaving a customer fund shortfall of $1.6 billion.
In addition, fraud is a potential problem, according to the FSA. Only one crowdfunding website, Seedrs, which launched last month, is currently authorised and regulated by the FSA.
None of the other sites are covered by the Financial Services Compensation Scheme, which covers deposits up to 85,000 pounds if a regulated financial institution collapses, or by the Financial Ombudsman Service, which helps settle disputes.
However, Michael Howe, director of career-change website Escape the City, which raised £600,000 from small investors in 10 days on Crowdcube, defended crowdfunding. “It’s great that normal people can put a bit of money into a growing company and feel like they’re part of something tangible,” he said.
For those who are considering any form of investment, and want some financial advice, the financial service advisors at Milsted Langdon can assist.
Steve Horton is a Chartered Accountant and a Chartered Financial Planner who specialises in helping clients to manage their pensions and investments