Crowdfunding – To Be Or Not To Be … A Sophisticated Investor

The phenomenon of crowdfunding (the collective effort of a large number of individuals who network and pool their resources) is growing exponentially in popularity as a way to fund software development, scientific research, arts projects, small businesses and, through companies like The House Crowd, property investment.

However, despite the groundswell of support from the public and politicians and legislation being passed in the USA in April to allow crowdfunding, the FSA have taken a different view describing crowdfunding this week as “risky and complex”.

It published a report informing consumers that most crowdfunded investment opportunities are unregulated, adding that while many offer higher returns than mainstream investments, the rarity of dividends and a lack of a secondary market, can make them risky and complex options.

According to the document, crowdfunding should be reserved for sophisticated investors, those who understand the apparent risks associated with crowdfunding and who accept they may lose their money if the business they helped to fund fails.

Let me preface my comments by stating that I realize there are unethical companies who are happy take money from people who do not understand what they are investing in or the risks associated with it. They may even be intentionally deceitful. The law clearly has a role to play in preventing such dishonesty and fraud.

But, whether the law has any role to play in deciding whether you are sophisticated or intelligent enough to make your own decisions about what you invest in is a matter for debate. I know where I firmly stand.

I categorically do not believe the law has any place (though it doesn’t stop it constantly interfering) in what people choose of their own free will to do to themselves or with their possessions, provided it does not cause others harm. I have never understood the arrogance of government to think they know (better than you) what’s best for you. I believe in a person’s right to decide for themselves and I do not underestimate their ability to do so. Yes, we all make bad decisions from time to time but it doesn’t mean I want to abdicate my rights to someone in Westminster. In short, I don’t need (or want) a nanny.
Yes, of course, there are risks involved in any investment – even with “safe” low returning bank accounts and pensions as we all now know far too well. They should be made clear to potential investors. If you do not understand or accept those risks then it’s simple – don’t invest. If the company has lied about them they should be prosecuted.

Which leads me to my second point, if, as the FSA suggested, crowdfunding should be the preserve of sophisticated and more experienced investors, then that negates the very reasons the concept exists – to give those people with less to invest (by default, usually less experienced investors), the opportunity to access better performing investments, and ‘dip their toe into the investment pool.’ Wealthy, sophisticated investors already have a range of investment products available to them (which cannot be accessed by the ordinary man on the street) and have little need for crowdfunding.

So whilst I wholeheartedly agree it is important for the FSA to ensure consumers are protected from fraud and are made fully aware of the risks, ultimately it should be the individual’s choice. Do your due diligence, ask questions, compile the evidence and make your own judgement as to what to do with your hard earned money. You don’t need to be a “sophisticated” investor to do that.

Share This Article