It was always there to some extent; parents helping over-stretched children – family helping extended family – neighbour helping neighbour; but now crowd financing has become mainstream. The idea is a collective effort of a large number of ordinary consumers sharing a small part of their wealth with others in return for monetary gain and the satisfaction of knowing that they are helping a small business get started or are providing much-needed finance to a young person with a great idea.
In simple terms crowd funding is a way of raising money without resorting to a bank. The product or venture to be financed might literally be anything. For example; a fully-fledged commercial venture to help launch a new product; or a shareholding in a new company; or the backing of a new community initiative; or simply some philanthropic support of a worthy cause.
Viewed from behind the desk of a bank manager such inventiveness would be mired in bureaucratic red tape followed by a very slow no. Viewed from the perspective of an individual consumer many of these types of ventures seem like a very good flutter for a small outlay. It is the aggregated amount of small inputs that makes crowd financing so effective and so demonstrably different.
If the banking system was working properly there would be no place for crowd funding. A regular supply of funds at a competitive price would satisfy demand. But the banking system remains torpid, so the concept of crowd financing is gathering ever-increasing momentum.
The internet has helped hugely – bringing the ideas of those who need financing to those who admire their plans. In this way the internet has classically brought buyers and sellers together. But there are risks! Despite the genuine intentions of many (and the proven success of the concept over many years) the fact that the activity is largely unregulated means that consumers are wary – but that may be about to change.
The Financial Conduct Authority (the UK financial regulator) has issued guidelines that accepts the activity as important; recognises it as a functioning part of the economy; and suggests regulating it as a legitimate service. This is a big step forward.
The FCA distinguishes between two types of crowd financing – loan-based and investment-based. Loan-based very much resembles a bank loan – funds are lent for a specific period of time at a pre-determined interest rate. Investment-based is where a consumer participates in a project for an indefinite period.
Now that the FCA has brought the activity into clearer focus there will be more consistency to the documentation that the consumer receives; greater clarity on the risks involved; a proper complaints procedure; and a cancellation or cooling-off period. MMPI welcomes the regulation of the activity (albeit in the UK for now) and hopes that crowd financing continues to flourish. The Irish regulator should investigate the growth in this important market. As we are forever wont to say – without growth there is no hope! (or without hope no growth!).