How Crowdfunding Took On Private Equity And Won was the headline on Forbes following the latest edition of The Deal, Beauhurst’s recent report on equity investments in private UK companies.
Yet, when I recently took part in a World Economic Forum roundtable on financial innovation, the host was concerned: “What’s happened to equity crowdfunding? Where has all the press hype gone?”
So, how can equity crowdfunding be both dominating and diminishing in the press? The answer is simple - it is becoming normal.
When Seedrs came onto the scene in 2012, equity crowdfunding was anything but the norm. Entrepreneurs raised money by pitching to angel networks, or shuffling from one Silicon Valley venture firm to another, not by putting a business plan online and asking ordinary people to invest their own money and become shareholders.
Early adopters of equity crowdfunding were seen as revolutionaries. Take healthy ice cream startup Oppo, for example, it rejected traditional angel investment to crowdfund from friends, family and consumers. Or Coinsilium, the blockchain investment company that chose to crowdfund as part of its IPO. The press covered the sector as a novelty, and the existing financial services industry was sceptical.
But five years on, crowdfunding has firmly established itself as a part of the early-stage equity fundraising landscape. According to Beauhurst, in 2016, a year that suffered an overall fall in private company investment, Seedrs experienced its biggest year to date. Venture firms are not only accepting, but even promoting equity crowdfunding as a complementary form of capital, dealing with platforms like Seedrs as they would any other co-investor. Seedrs is regularly approached by banks, financial advisers, and investment managers to explore how collaborations would work.
In the last year, we’ve seen HM Treasury consider equity crowdfunding for the new Innovative Finance ISA and HM Revenue and Customs engage with platforms on changes to the Enterprise Investment Scheme.
At European level, the Commission has published a report on crowdfunding as part of its Capital Markets Union Action Plan, and announced changes to the Prospectus Directive specifically with crowdfunding in mind. Whilst government policy is inevitably moving more slowly than market developments, the acceptance of crowdfunding is encouraging.
The UK regulator, the Financial Conduct Authority (FCA), is currently reviewing the crowdfunding regulatory regime. It is clear that the FCA has come a long way in its understanding of the industry since 2014 when its rules were first introduced. And, far from indiscriminately cracking down (as a few scaremongering press have commented), the FCA is considering ways to make sure the industry is sustainable to ensure it grows in a way that both enhances competition in financial services and protects investors. Crowdfunding platforms should take some comfort in that.
So what are my predictions for equity crowdfunding in 2017?
- More engagement and collaboration with existing financial services institutions. As equity crowdfunding continues to prove itself as both a cost-effective and efficient way of raising and investing capital, more incumbents will try to find ways to work with platforms
- Market growth prompting further policy engagement. The Cambridge Centre for Alternative Finance is due to publish its 2016 market sizing report. Data on market growth will re-open discussions with governments and regulators and encourage further policy support
- Changes to FCA rules. The FCA will introduce new crowdfunding rules. If platforms collaborate with the FCA on its review and engage in a proactive manner, the changes can only strengthen the industry’s credibility
- Opportunities arising from Brexit. We don’t yet know what Brexit will mean for financial services - but, as the European market leader in equity crowdfunding, there will be opportunities for the UK whatever the outcome
- Less hype. There will continue to be less press hype around equity crowdfunding, but that shouldn’t be a concern; it’s just a sign that crowdfunding is becoming normal