What is crowdfunding?

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Published on LexisPSL on 04/12/2013

The following TMT Q&A provides comprehensive and up to date legal information covering:

  • What is crowdfunding?
  • Main concept
  • UK regulatory regime
  • Crowdfunding and intellectual property
  • Risks and benefits

What is crowdfunding?

Main concept

The basic premise of crowdfunding is that, rather than targeting a few select investors to finance a project, entrepreneurs instead seek to raise the required funds in smaller denominations but from a larger audience, which they reach via social media. In most platforms, the money pledged to a particular project is not released unless the project succeeds in reaching its predefined financial target within a given time limit.

There are typically three variations of crowdfunding model:

  1. the donations model

  2. the lending model

  3. the investment or equity model

For a comprehensive look at the various types of crowdfunding and the related legal issues see Practice Note: The regulation of crowdfunding platforms.

UK regulatory regime

The various crowdfunding models are treated differently by the UK financial services regime.

Donations model: The donations model currently falls outside the scope of the regime since it does not involve a return on financial investment.

Lending model: The lending model is also not currently within the scope of the regime but' depending on the nature of the intended borrower' the model may be caught by the provisions in the Consumer Credit Act 1974.

Investment/equity model: The Financial Conduct Authority (FCA) has recently published guidance warning would-be investors using the investment model of the risks involved. The FCA believe that most crowdfunding should be targeted at sophisticated investors, who understand how to value

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