The war of words over the definition financial regulators should use for the process of raising money from online backers escalated after the head of the crowdfunding industry’s trade group accused her peer-to-peer lending equivalent of being unhelpful and inaccurate. Julia Groves, chair of the UK Crowdfunding Association (UKCFA), was responding to claims by Christine Farnish, her counterpart at the Peer-to-Peer Finance Association that the Financial Conduct Authority displayed a worrying ignorance of the fast evolving market by using the word “crowdfunding” as a catch-all for both debt and equity fundraising.
“Any suggestion that crowdfunding is just about taking equity in early-stage businesses is both unhelpful and entirely inaccurate,” Ms Groves said. She added that there are crowdfunding platforms that do facilitate loans through debt-based securities, which raise money for existing businesses and infrastructure with relatively low-risk investment through debentures and bonds. The argument over the words used by the FCA in its consultation about regulation of the online fundraising market started when Ms Farnish criticised the FCA for using the phrase “debt-based crowdfunding” in its consultation on regulation. “Language is important,” she said. However, it is more than just a battle of semantics. Both sides are keen to see the market legitimised by government regulation but are concerned that providers, whether they be peer-to-peer lenders or crowdfunding marketplaces, will be penalised if the rules are poorly framed. Crowdfunding has become a catch-all term for various funding proposals, ranging from people taking equity stakes in new ventures to causes looking for donations to get off the ground. Kickstarter, the world’s largest crowdfunding platform, has a stated mission to help bring creative projects to life. Those pledging money over the platform tend to be offered free samples or special experiences rather than shares in return for their cash. Those that call themselves peer-to-peer lenders differentiate themselves from such crowdfunders by focusing purely on linking companies and individuals with those willing to lend them money at a certain rate of interest. The FCA tried to create a distinction between these different forms of web-based fundraising by announcing plans to create separate levels of regulation for debt and equity funding services, Ms Groves noted. This, she claimed, was more important than arguing whether debt-based fundraising should be classed as crowdfunding or peer-to-peer lending. “The characterisation of peer-to-peer simple loans versus debt-based crowdfunding models as low-risk versus high-risk is, in our view, a mistake,” she said. “Both models allow retail investors to access lower-risk assets, but where there is a debt security or a retail bond the funds are raised by a public limited company with a full offer document and higher standards of disclosure. That these should be treated as higher-risk than a simple loan is counterintuitive.”