‘Crowdfunding’ is a relatively new concept. For companies carrying out this practice, it can be a valuable tool for raising capital. Make sure, however, that proper financial compliance is observed.
Understanding the Concept
One example of crowdfunding is peer-to-peer lending, where investors lend money to companies and then expect to receive interest payments, and eventually a return of their capital. Crowdfunding can also be investment-based, where investors provide funding to a company without entering into a loan.
Increasingly, crowdfunding is associated with investment in property. Property Moose and The House Crowd are two of the best-known companies to have entered this market in the last two years. They provide a way for consumers to invest in property without owning a home, and can be done with sums as small as £500.
Rising property prices can never be definite, but prices across the UK as a whole rose by around 8% in the 12 months to April 2014 and demand certainly exceeds supply at present, which usually leads to rising prices. Crowdfunding allows people to benefit from rises in property prices if they are unable to afford their own property, or do not want the responsibilities of being a property owner, which come with buy-to-let purchases.
Purchasing a Property
Property crowdfunding is usually facilitated via a dedicated website. The company pools together money from a large number of investors and uses these funds to buy property. The property is purchased via a limited company and investors become shareholders in that company. Investors can choose which property they wish to invest in from those listed on the crowdfunding website.
Initially, the property is rented out, and investors may receive a share of the rental income during this period, but when it is sold, the profits are divided up between the investors, once the crowdfunding company has taken its share. The property will always be sold after a specified number of years unless the investors with a share in that property vote against it.
Crowdfunding is regulated by the Financial Conduct Authority (FCA). So, the practice’s proper financial compliance is unquestionable. One of its rules that firms operating in the area must follow is that a declaration must be obtained from customers stating that they are not investing more than 10% of their capital in a crowdfunding scheme. Otherwise, the crowdfunding firm must demonstrate that they have carried out an ‘appropriateness test’, where the firm ensures that the customer is a sophisticated or high net worth investor who fully understands the risks involved.
The FCA is conducting a thematic review into crowdfunding during the first six months of 2014. A thematic review involves visiting a cross-section of firms to assess conduct standards on one specific issue. The results of the review are then published as guidance for the industry as a whole.