CrowdFunding and the FCA

By Barry-Sheerman-MP-Chairma-002Barry Sheerman (Huddersfield, Labour)

It came as a slightly early Christmas present to learn that I had managed to secure a debate on crowdfunding and crowdsourcing, and the implications for the Financial Conduct Authority’s current inquiry into the regulation, or the possible need for regulation, of crowdfunding.

I came to crowdfunding in a rather peculiar way. I kept hearing people talking about it, and I am a serial and committed social entrepreneur. In fact, the other day a journalist said that I must be one of the few MPs who own a church, a poet’s house and a pub, all through trusts, foundations or charities that I chair.

As I say, I am a social entrepreneur and social entrepreneurs always want money. I do not mind asking rich people, big corporations, trusts and foundations for money, but sometimes—especially since 2008—it has been harder raising money from those sources than it was before.

Increasingly, I heard about social impact investment and crowdfunding, so I decided that I needed some more information. I got in touch with the House of Commons Library, but the staff there said they had never heard of crowdfunding; it was the first time that the staff of the Library of this great House has ever said that it could not help me. I then tweeted about crowdfunding, and all sorts of interesting people pitched up in the House of Commons and started to educate me about it. We formed the Westminster crowdfunding forum, we have an all-party group on crowdfunding and non-banking finance, and suddenly we have what I think is the first debate on crowdfunding in Parliament; I am grateful that we have it.

What is so exciting about crowdfunding is that it gives power to the crowd—to ordinary people—to say that there is a problem in their community and that they can form a small group to head something up. They can form a community enterprise and they can fund it through the crowd on the internet, on a platform; there are now many platforms out there that enable crowdfunding. Some of them specialise in education, others in financing films and theatre, and others in community enterprises. However, that is only one side of crowdfunding.

For me, crowdfunding is one of the most vibrant, exciting and important industries to appear in the past decade. The possibilities of crowdfunding are endless, first because all of us know that most people who are entering employment in this country today will work for small and medium-sized enterprises. If we can have more and more SME start-ups and they can grow successfully, the country will be so much wealthier and so much more successful.

The fact is that start-ups have the most difficulty in getting money from the conventional banks. Very often, the banks have failed them, because start-ups have no track record and no history; consequently, banks are very cautious about lending money to them.

Crowdfunding enables and empowers people who want to start a business to do it in their own way, and to raise the money to do so. It often starts with friends and family, and then a wider range of people become excited about the enterprise and put a little bit of money in to

help it start. The history of the last few years has been that many more businesses have started up successfully using crowdfunding and the new social media to reach out to a broader audience and involve them in a very interesting way.

Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet. However, people become confused about what is crowdfunding and what is not. I will talk briefly about four kinds of crowdfunding.

First, there is equity crowdfunding. It is very simple indeed. Someone wants to start a business and they give a share in their business to someone else. It may be worth a fiver, or fifty quid, but it is usually only a small amount—an amount that I am sure you, Mr Chope, and I could afford to put into an enterprise that we believed in and that might make us money in the longer term. It is also possible for someone to invest in the little corner shop that they do not have in their village or community, or in a failing pub that the community wants to take over. There are lots of enterprises that crowdfunding can help.

However, there is the very interesting issue of starting businesses—private sector businesses. There is nothing wrong with starting businesses. As chairman of both the all-party group on manufacturing and the all-party group on management, I am a passionate supporter of well-managed enterprises and start-ups.

Equity is one way that crowdfunding works; someone can invest money in that way. However, it is also possible to borrow and lend money through the internet and crowdfunding; that is the second form of crowdfunding I want to discuss. Some people in the peer-to-peer lending area are a little cautious about being called part of the crowdfunding empire, but—in broader terms—they certainly pitch up to the Westminster crowdfunding forum. Such lending allows people to borrow money at very low rates of interest, and it also allows people to lend money at quite high rates of interest. People might think that is impossible, but the fact is that we have a system that gets rid of the intermediary. It is peer to peer—very direct. There is no big bank, with glass panels and marble halls, to go into, or a network of branches of banks, with all the people that have to be employed in them. There is a very simple relationship, and it means that the facility to lend and borrow money is made quite radically different.

Thirdly, there is rewards crowdfunding. That is the kind of crowdfunding that you, Mr Chope, and I might be most interested in; I realise that I am interpreting your wishes in saying so. Rewards crowdfunding means that someone asks someone else to help them with an enterprise, such as the John Clare Cottage Trust, which I am involved with and which is a national centre for learning outside the classroom. We run a campaign called every child’s right to the countryside. What we do to raise money is to ask people, “Will you adopt a school in less affluent area of the country, whose pupils would benefit from coming to the countryside and learning in the countryside for a day?” We look to crowdfund up to £500 to bring a whole school class to the countryside for a day. We can do that by offering rewards, because we not only give the reward of a day in

the country to the pupil but—as we will do in the new year—we will give a limited edition of John Clare’s love poetry to those giving money. It is a collection of poems that were never published in his lifetime, because they were a little steamy for Victorians. We can give the reward of a limited edition, or free entry to the lovely John Clare poet’s house in Helpston, which is right next to Burghley house. So, with rewards crowdfunding, people do not get their money back, but they get the engagement, and the reward might be, at the bottom end, with a small amount of money, a mug or a tea-towel. Further up the scale, there are more substantial crowdfunding rewards.

Fourthly, there are donations. Mr Chope, you will know about the success of justgiving.com, which is estimated to have raised £3 billion for good causes, in direct donations.

As I say, there are various types of crowdfunding, and I hope that I have educated those attending this Westminster Hall debate about them.

Crowdfunding gives all of us access to the money to make things happen. According to a recent report—published only this week—by the charity Nesta, Cambridge university and the university of California, Berkeley, the alternative finance sector raised £939 million in the UK in 2013. That is a hell of a lot of money, and it was up by 91% from the £492 million raised in 2012. The UK alternative finance market provided £332 million-worth of early stage growth and working capital to more than 3,700 start-ups and SMEs in the UK in 2013 alone. So this sector is not small beer; it is big and it is going to grow.

If we play it right, the UK is likely to become the centre of crowdfunding in the world, partly because the United States, in its haste to regulate crowdfunding, has, many argue, strangled the baby at birth. That is the truth; the US has overregulated and made it almost impossible, certainly for equity crowdfunding, to carry on.

Those of us who are passionate about crowdfunding want to make this appeal: whatever the Financial Conduct Authority does in regulation—it is currently consulting—it must get it right. We are not against all regulation, but it must be appropriate, and it must be quite soft regulation. It can be effective, but if we go down the US route, we will lose the opportunity to have one of the biggest growth sectors and most interesting phenomena of the modern economy.

The FCA should not present an obstacle to the growth of the sector. The criticism that I am getting is that if the FCA is not careful, it will take the “crowd” out of crowdfunding. I am not against the FCA. I was quoted in The Independent earlier this week or late last week as asking for a halt to the consultation process. I did not say that; I never spoke to the journalist in question, and I do not believe that. The consultation process is good, and we have certainly had a good face-to-face relationship with the FCA over many months; we just want to ensure that we get it right, and that is what this debate is partly about. We want to ensure that we do not make a mistake.

Certain language used by the FCA and people around it would I think horrify your constituents, Mr Chope, as it would mine. The FCA suggests that only “sophisticated” investors should have access to crowdfunding; in other

words, those who have a relatively high net worth. The FCA’s consultation paper makes a distinction between retail and sophisticated investors. That kind of language makes me nervous, because it is insulting to ordinary people, suggesting that they do not know how best to invest a little bit of money.

My constituents can go down to a bookie’s, play fixed-odds betting, and lose thousands in a day. Those machines are dreadful things, and I have campaigned against them. My constituents can also go next door and borrow money at ruinous rates of interest from payday lenders. They can go online to gamble and, especially at Christmas, spend a lot of money that they do not really have. Why should ordinary people not be able to put a fiver, £10 or even £50—small amounts—in something that they think will grow?

I will give an example that might interest you, Mr Chope. A plethora of universities are now getting into crowdfunding. If your university is like mine, Mr Chope, the only time you hear from them is when they want some money. That angers a lot of people, because that is the only communication that they have with their alma mater; I am looking at Dr Huppert on that.

Crowdfunding allows universities such as the university of Huddersfield—university of the year last year and entrepreneurial university of the year the year before—to be able to have a crowdfunding relationship, so that when graduates and postgraduates come through, they can say, “Not only can we help you find the money for your start-up business, our first port of call is our alumni, who might want to invest back in a new generation of entrepreneurs coming out of their university.” There is so much excitement here.

There is a common-sensical way of having regulation that does not cause damage. I want to make it clear today that there has been a good dialogue with the FCA. I hope that it is listening to what we are saying. I also hope that the Treasury, the Department for Business, Innovation and Skills and all the other people in Government who know about the issue will learn about it and realise the enormous potential for growth in the British economy.

Crowdfunding can bring communities back to life. Political parties have hardly any membership. There are low levels of voting in general and local elections. Here is something through the social media—look at 38 Degrees and its achievements—that will reinvigorate our communities, grow them and make them wealthier, and will be a new way of funding social and economic activity in our country.

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