FCA details concerns with some investment-based crowdfunding platform practices

Out-Law News | 05 Feb 2015 | 11:29 am | 2 min. read

Most crowdfunding platforms that help businesses gain new investment do not ensure that prospective investors have sufficient information about the risks of investing in those companies, the Financial Conduct Authority (FCA) has said.

The regulator said most investment-based crowdfunding platforms it assessed in a regulatory review (12-page / 183KB PDF) stressed many of the benefits of investments via their platform but without also giving "a prominent indication of risks". It also said it had seen examples of "cherry-picking" of information about investments being displayed on the platforms and warned this could lead "to a potentially misleading or unrealistically optimistic impression of the investment".

Many of the investment-based crowdfunding platforms also downplayed important information, the FCA said. This includes the diminishing of "risk warnings" by referencing claims that previous investors had not lost any capital they had invested, it said.

"This is of particular concern for us given that 62% of equity crowdfunding investors surveyed by Nesta and the University of Cambridge (Nesta 2014) described themselves as retail investors with no previous investment experience of early stage or venture capital investment," the FCA said. "Firms need to provide investors with appropriate information, in a comprehensive form, so that they are reasonably able to understand the nature and risks of the investment and, consequently, to make investment decisions on an informed basis."

The regulator said it is giving particular scrutiny to the information investment-based crowdfunding platforms are displaying to prospective investors and said that it must not be "misleading".

"So, for instance, claims that shares offered on a platform are the same as shares held by venture capitalists should be true: we would be concerned if these claims were not being verified and firms were, therefore, promoting the shares with misleading information," the FCA said. "This becomes significant if venture capitalists are able to profit from successful investment opportunities but crowdfunding investors find, when an investment succeeds, that equity dilution means they do not share in the profits to the same extent."

The FCA also expressed concerns about risks being "overlooked" as a result of "negative comments" left by investors on platform forums being deleted. "Market intelligence" has suggested that this activity is going on, it said.

Financial promotions were also identified as an area of concern by the FCA. It raised particular points about the way mini-bonds have been promoted on investment-based crowdfunding platforms and via direct marketing activities.

It said that "the risks to capital" and the lack of protection for consumers under the Financial Services Compensation Scheme need to be explained to prospective investors in mini-bonds, and that platforms must not "compare their interest rates with those obtainable from savings accounts where investors’ capital is not at risk".

The FCA also said that retail bonds and mini-bonds should not be promoted in the same way as "there are important differences" between the two. "For example, mini-bonds are generally not traded, so investors’ money is effectively locked in until maturity as the mini-bond cannot be sold on before the end of its term," it said. "This should be made clear to prospective investors."