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Brought to you in partnership with Locality, Plunkett UK and Power to Change
The Community Shares Handbook

5.6 Crowdfunding

Crowdfunding is an increasingly popular fundraising tool. The FCA has identified five main types of crowdfunding: donation-based, reward-based, loan-based, investment-based, and exempt. Community share offers fall into the last of these categories and are exempt from the need for FCA authorisation or regulation. 

Donation-based and reward-based crowdfunding may be attractive fundraising options for a new society, especially one at an early stage of development that needs to raise money to meet pre-start costs. Donation-based crowdfunding can generate risk capital for a society, free from any obligation to provide a financial return to the donor. Reward-based crowdfunding is more onerous in the sense that the recipient of such funds enters into a contract to provide a reward in the form of a product or service. Both these forms of crowdfunding are unregulated activities and do not need FCA authorisation.

Loan-based and investment-based crowdfunding are regulated activities. Loan-based crowdfunding, also known as peer-to-peer lending, is a part of the consumer credit market. Regulatory responsibilities for this market were transferred from the Office of Fair Trading to the FCA on 1 April 2014.The FCA has introduced a disclosure-based regime to regulate loan-based crowdfunding, and ensure that investors have information that is fair, clear, and not misleading, upon which to base their investment decisions.  

Investment-based crowdfunding is a regulated activity. All investment-based crowdfunding platforms require FCA authorisation to carry out regulated activities. In March 2014, the FCA published a review of the regulatory regime for crowdfunding, including investment-based crowdfunding in non-readily realisable securities. Together with new consumer protection rules introduced in 2014, the FCA requires that financial promotions involving such securities are targeted only at high net worth or sophisticated investors, those who take regulated advice, or those who will confirm that they will invest less than 10% of their net assets in these types of security.

Community share offers are exempt from regulation, and crowdfunding platforms promoting community share offers need to reflect the unique characteristics of this form of share offer. A crowdfunding platform can ease the administrative burden of making a community share offer by providing a means for processing investment applications online. For larger community share offers involving hundreds or thousands of applications, this is a significant benefit. But crowdfunding has its drawbacks: it excludes people without access to websites and online payment methods; it may be more difficult to aim the offer at the target community; and it may undermine efforts to engage members in the day-to-day activities of the society.