Monday, 16 November 2015

Why we musnt abuse the Crowd

Equity Crowdfunding is rapidly becoming a world wide phenomenon. Each week we read about new laws being passed in new countries to allow this source of SME investment to flourish.

The evidence that it can work, that it really can achieve what is intended - a flourishing, sustainable growth in SME and start ups, is very thin. It took off in the UK in 2011 as the then coalition government were desperately looking for ways to replace bank lending, which had crashed after 2008/9. No investment, no thriving SME sector.......very bad press. The emphasis was very much on lite touch regulation or essentially no regulation. Nothing has changed since.

So far the enthusiasm of the crowd has held firm. The very generous income tax reliefs available here have stoked the fire. The fire is still burning but the fuel is just beginning to get a little damp. What people want and what they have been led to expect by the PR on the platforms, are EXITS and lots of them.

So what do we have in terms of ROI. Well to be honest, nothing. One very small return which if you look at the facts was really not advantageous to crowd investors and that is it. Hundreds of businesses funded and one small shrew sized exit. Failures to date have been limited to under 100 but the evidence is that many if not most of the funded companies are struggling to get even close to their healthy Crowdfunding projections. As a crowd investor, being locked into a limping company is just as bad as losing your investment altogether.

Platforms have been and continue to be guilty of publishing misleading information and occasionally there is evidence of fraud. Our systems are not set up to stop this - ECf has become established out of a political necessity and the protection is simply not in place.  No one has had the cojones to rein in the platforms PR.

The risk is that the crowd will grow bored of being told one thing - we will grow this business ten fold in 3 years and then exit making you lots of money - and having another - sorry it didnt go to plan and we need more money - delivered. If this happens, as it must unless we get exits, then there will be little hope of reversing it. The wave of enthusiasm has been large and the backwash, should it all go wrong, will wreck the whole idea.That in our opinion would be crying shame.

Its time to stop platforms exaggerating the potential upside, force them to be liable for the information they publish and give this nascent new funding channel a chance of lasting. The Crowd are the most important thing here after the businesses and the platforms need to realise this. Without them its curtains.

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