20 September 2023

Technological startups are full of innovative ideas, but often short on cash to fund those ideas. The post-2008 economic crash gave rise to a new way to make up the financial shortfall. As financial institutions tightened their lending standards, tech startups grasped onto the concept of appealing to the general public for funding. The result was ‘crowdfunding’.

Startup Crowdfunding

Crowdfunding involves online platforms offering unregistered securities to the non-professional investor. A type of ‘mini-IPO’ (Initial Public Offering). Democratising the marketplace, crowdfunding allows startups to reach out to the public for financing. Bypassing traditional financial intuitions by appealing directly to the public sphere. Thus, inviting the average person to participate in the growth of a potential new ‘Apple’ or ‘Intel’, while at the same time dangling the prospect of a lucrative return on the investment.

Crowdfunding Advantages

Some of the advantages are:

• It can be a fast way to raise finance with no upfront fees.
• Pitching a project or business through the online platform can be a valuable form of marketing and result in media attention.
• Sharing your idea, you can often get feedback and expert guidance on how to improve it.
• It is a good way to test the public's reaction to your product/idea - if people are keen to invest it is a good sign that your idea could work well in the market.
• Access to a diverse investment base.

Crowdfunding in the UK

Crowdfunding is regulated by the Financial Conduct Authority (‘FCA’). Online platforms must have permission from the FCA to engage in crowdfunding. These platforms must adhere to strict regulations regarding anti-money laundering and data security. Seedrs, Kickstarter and Crowdcube, to name only a few, are examples of highly successful online platforms that have helped fuel the rise of crowdfunding.  According to ‘Statista’ the transaction value of crowdfunding in the UK is projected to reach £50M in 2023, with steady projected growth over the next 5 years.

Crowdfunding Disadvantages

Any startup that is contemplating using crowdfunding to finance the future of their company, also needs to be aware of the potential pitfalls:

• Venture capital may shy away from companies that use crowdfunding. These investors fear that their equity position in the company could become diluted with the influx of thousands of small investors.
• Any failure to raise the needed capital via crowdfunding, may harm the company’s business reputation and damage the opportunity to secure alternative sources of financing.
• It’s not necessarily an easier route – it can be hard to get on the platforms amongst stiff competition and you need to do a lot of work in building up interest before the project launches - significant resources (money and/or time) may be required.
• Any failure to fully comply with the regulations could result in financial penalties and the suspension of the crowdfunding campaign. Startups looking to enter the crowdfunding space need to be aware of the entire landscape and should seek competent legal and business counsel before proceeding.

If you wish to discuss Crowdfunding in more detail, feel free to contact a member of our Corporate team.

Kelly Finley, Solicitor: kf@bto.co.uk / 0131 222 2939