Response to Consultation on Crowdfunding Regulation in UK Its worth highlighting to significant unintended consequences if the crowd funding regulations go ahead in its current form: 1. The proposed regulations require institutional investors who invest in the normal cause of business in loan based investments, will be required to comply with the same rules that crowd funding platforms need to abide by. This will dissuade them from the market. Institutional investors, such as insurers and pension funds could inject huge amounts of liquidity in the peer-to-peer lending sector, making much needed loan funding available to entrepreneurs and SMEs. 2. For equity based crowd funding the FCA is restricting such investments to sophisticated and high net worth investors. For ordinary "unsophisticated" investors, they will be restricted to only investing 10% of their portfolio. Platforms will also be burdened with an appropriateness test which will require them to assess the knowledge and skill of the unsophisticated investor in invest in equity based crowd funding before allowing them to invest. This will take the crowd out of crowd funding. This topic was hotly debated in Parliament on 18th of December 2013, and Members of Parliament agreed that this industry has huge potential and should not be restricted by regulation. Interested in your views. Feel free to email me on jay.tikam@vedanvi.com to discuss or share your views.

1. 1
18
December
2013
Sent
By
Email
to
cp1313@fca.org.uk
Jason
Pope
and
Susan
Cooper
Policy,
Risk
&
Research
Division
Financial
Conduct
Authority
25
The
North
Colonnade
Canary
Wharf
London
E14
5HS
Dear
Jason
and
Susan
Response
to
Consultation
Paper
13/13
(“CP13/13)”
FCA’s
Approach
to
Crowdfunding
(and
similar
activities)
I
set
out
below
our
formal
response
to
CP13/13
in
the
capacity
as
a
representative
of
a
professional
services
firm
Vedanvi
Ltd,
which
provide
management
consultancy
services
in
the
areas
of
governance,
risk
and
compliance.
We
welcome
the
regulation
of
the
wider
consumer
credit
industry.
The
supervision
and
regulation
of
this
fast
growing
industry
will
deliver
better
outcomes
for
consumers,
especially
within
certain
sectors.
To
put
our
response
into
context,
we
would
like
to
bring
to
your
attention,
timely
research
recently
carried
out
by
a
team
from
Nesta,
Berkeley
University
and
University
of
Cambridge
on
the
crowdfunding
industry
(“The
rise
of
future
finance:
The
UK
Alternative
Finance
Benchmarking
Report”
by
Liam
Collins
(Nesta),
Richard
Swart
(University
of
California,
Berkeley)
and
Bryan
Zhang
(University
of
Cambridge)).
Key
findings
include:
• UK’s
alternative
finance
market
grew
by
91%
from
£492
million
in
2012
to
£939
million
in
2013
• Cumulatively,
the
average
growth
rate
over
the
last
three
years
has
been
75%,
contributing
£1.74
billion
of
personal,
business
and
charitable
financing
to
the
UK
economy.
• A
particularly
significant
finding
is
that
collectively,
this
alternative
finance
market
in
the
UK
provided
£463
million
worth
of
early
stage
growth
and
working
capital
to
over
5,000
start-­‐
ups
and
SMEs
between
2011
and
2013,
of
which
a
staggering
£332
million
was
accumulated
in
2013
alone.
This
is
funding
that
was
previously
unavailable
to
SMEs
because
of
banks’
reluctance
of
lending
to
this
segment
of
the
economy.
• The
market
is
predicted
to
grow
to
£1.6
billion
in
2014
and
provide
£840
million
of
business
finance
to
start-­‐ups.
• In
2013,
peer-­‐to-­‐peer
lending
market
took
in
£287
million,
and
peer-­‐to-­‐business
lending,
£193
million.
The
equity
crowdfunding
market
registered
£28
million,
but
growth
rate
was
a
massive
618%
from
2012
to
2013.
Compared
with
a
growth
rate
of
126%
for
peer-­‐to-­‐peer
lending.
Clearly
this
is
an
industry
in
its
infancy
and
is
rapidly
growing.
UK
is
the
eminent
leader
of
this
market,
and
current
regulatory
initiatives
are
at
the
forefront
of
innovation.
We
understand
the
FCA’s
predicament
in
trying
to
regulate
such
an
industry.
Balancing
consumer
interests
against
financial
innovation,
market
disruption
and
competitiveness
poses
a
significant
challenge
at
this
stage
in
the
evolution
of
the
crowdfunding
industry.
Anecdotally
this
process
could
be
described
as
“building
the
Registered
in
England
&
Wales,
Registration
Number
07936886
45
King
William
Street,
London
EC4R
9AN
Tel:
+44
(0)
203
102
6750
enquiries@vedanvi.Com
www.vedanvi.com
1

2. 2
plane
while
flying”
and
certainly
major
changes
and
further
fine-­‐tuning
may
well
be
necessary
along
the
way
until
the
market
matures.
General
observations
1. Consultation
period
-­‐
Given
the
infancy
and
transitory
nature
of
the
industry,
as
well
as
the
fact
that
very
little
research
is
actually
available,
we
believe
that
stakeholders
would
have
preferred
more
time
to
consider
and
respond
to
the
proposed
regulations.
By
the
FCA’s
own
admission,
this
consultation
period
is
shorter
than
is
usually
the
case.
Ideally,
the
consultation
process
should
be
extended
to
allow
for
more
research
and
dialogues.
2. Simple
Categorisation
-­‐
Despite
it
newness,
this
industry
is
diverse.
There
are
several
types
of
platforms
emerging,
each
with
their
own
unique
business
models
and
risk
profiles:
a. Peer-­‐to-­‐peer
lending
b. Peer-­‐to-­‐business
lending
c. Invoice
trading
(firms
sell
their
invoices
to
a
pool
of
investors)
d. Equity
based
crowdfunding
e. Debt
based
securities
(lenders
receive
a
non-­‐collateralised
debt
obligation
typically
paid
back
over
an
extended
period
of
time
–
similar
to
a
bond)
f. Revenue/profit
sharing
crowdfunding
g. Microfinance/community
based
shares
We
question
whether
the
two
categories,
loan
and
investment
based
crowdfunding
adequately
capture
this
diversity,
especially
given
low
risk
treatment
of
the
former
and
high
risk
treatment
of
the
latter.
Practical
implementation
challenges
are
bound
to
arise.
How
would
the
FCA
treat
platforms
offering
hybrid
loan
and
investment
based
securities,
for
example?
How
are
invoice
trading
platforms
treated?
How
would
financial
promotions
be
policed
for
loan
investment
exhibiting
equity
like
characteristics?
3. High
Risk
vs.
Low
Risk
–
Currently
there
are
no
restrictions
on
the
type
of
investors
that
could
receive
financial
promotions
or
actually
investment
in
loan
based
crowdfunding.
High
yields
have
attracted
investors
relying
solely
on
their
pensions
for
day-­‐to-­‐day
living
expenses
to
loan
based
platforms,
exposing
them
to
higher
risk
of
default.
Even
a
small
percentage
default
rate
could
have
a
material
impact
on
monthly
income.
Recipients
of
the
loan
based
funding
are
most
likely
to
have
the
same
risk
profile
as
businesses
raising
equity
based
finance.
We
would
therefore
question
whether
such
a
bipolar
approach
between
the
regulatory
treatment
of
the
two
platforms
is
appropriate.
The
proposed
regulations
provide
more
of
an
incentive
for
investors
to
choose
loan-­‐based
crowdfunding
at
the
expense
of
investment-­‐based
crowdfunding,
hence
stifling
the
growth
of
the
latter
market.
4. Sophisticated
vs.
unsophisticated
Investors
-­‐
We
appreciate
that
the
FCA
is
constrained
by
the
Financial
Services
Markets
Act
of
2000
(FSMA)
and
the
2012
in
terms
of
the
definition
of
sophisticated
vs
unsophisticated
investors.
We
think
that
a
strict
interpretation
may
give
rise
to
unintended
consequences,
as
the
traditional
definition
may
be
inappropriate
for
this
new
industry.
Social
networking
is
the
pillar
upon
which
this
industry
has
been
built.
Typically
founders
are
most
likely
to
be
funded
by
friends
and
family
through
the
platforms,
especially
in
the
first
round
of
fundraising.
In
such
an
instance,
the
investors
know
the
business,
the
management
team
and
would
have
a
keen
appreciation
of
associated
risks.
Despite
them
being
classified
as
unsophisticated,
are
they
really?
Registered
in
England
&
Wales,
Registration
Number
07936886
45
King
William
Street,
London
EC4R
9AN
Tel:
+44
(0)
203
102
6750
enquiries@vedanvi.Com
www.vedanvi.com
2

3. 3
Lets
take
another
example.
This
industry
is
most
likely
to
attract
non-­‐traditional
and
so
called
“unsophisticated”
investors
who
may
have
a
deeper
understanding
of
new
age
business
models
or
technology
in
which
they
are
willing
to
invest.
In
fact
their
understanding
of
such
investments
may
be
much
better
than
investors
traditionally
classed
as
sophisticated
or
high
net
worth.
Restricting
such
savvy
but
“unsophisticated”
investors
could
unnecessarily
limit
potentially
lucrative
investment
opportunities
to
this
segment
of
the
population.
At
a
high
level,
we
agree
with
the
general
direction
of
the
proposed
rules.
The
devil
is
clearly
in
the
detail
and
unintended
consequences
will
only
become
evident
during
implementation.
We
highlight
below
specific
areas
of
concern,
which
we
believe
could
have
the
most
significant
impact
on
the
future
development
of
the
industry.
Loan
Based
Crowdfunding
1. The
consultation
identifies
five
types
of
crowdfunding.
Invoice
based
crowd
funding
is
not
explicitly
mentioned.
The
joint
research
found
that
invoice
trading
stood
at
£97
million
in
2013,
in
comparison
to
equity
based
crowdfunding,
which
stood
at
£28
million.
One
can
assume
that
invoice
based
investments
could
fall
under
loan-­‐based
crowdfunding,
however
it
is
open
to
interpretation
and
many
such
platforms
may
be
forgiven
for
assuming
that
they
fall
outside
the
scope
of
the
regulations.
Certainly
there
are
invoice-­‐based
platforms
that
explicitly
restrict
investment
to
self-­‐certified
and
high
net
worth
retail
investors.
However
many
others
don’t,
and
may
unknowingly
be
promoting
such
investment
to
unsophisticated
investors.
High
yields
will
attract
unsophisticated
investors
to
these
platforms,
exposing
them
to
a
different
type
of
risk
profile
associated
with
such
investments.
If
their
regulatory
treatment
is
not
made
explicit,
there
is
a
danger
of
creating
unleveled
playing
fields
between
the
different
types
of
crowdfunding.
Investing
money
via
loan
based
crowdfunding
platform
in
the
course
of
business
2. The
FCA
regard
loan
based
crowd
funding
as
an
investment.
However,
as
far
as
institutional
investors
are
concerned,
they
regard
this
activity
as
a
lending,
and
hence
apply
the
requirements
of
the
Consumer
Credit
Directive.
Clearly,
there
are
inconsistencies.
3. Such
institutional
investors
will
themselves
have
to
comply
with
crowfunding
regulations,
despite
never
dealing
directly
with
investors
in
the
same
way
that
platforms
do.
FCA
and
PRA
already
regulate
such
firms
under
a
separate
regime,
and
surely
their
clients
would
already
be
protected
through
those
regulations.
4. We
don’t
believe
such
a
dual
regulatory
framework
was
intended.
Furthermore,
the
proposals
would
raise
significant
practical
challenges.
How
would
such
institutional
investors
implement
the
regulations,
especially
around
financial
promotions?
What
are
the
roles
and
responsibilities
of
the
platforms
and
those
of
the
institutional
investors?
5. Of
significant
concern
is
the
fact
that
this
proposal
would
deter
institutional
investors
from
entering
this
market
(given
the
added
compliance
burden).
Their
absence
would
significantly
diminish
the
much-­‐needed
pool
of
funding
available
to
SMEs.
Institutional
investors
are
increasing
looking
to
alternate
investment
in
this
low
yield
environment.
Even
if
such
institutions
only
invest
a
tiny
fraction
of
their
portfolio
to
test
the
market,
it
nevertheless
would
give
this
sector
a
huge
boost.
Registered
in
England
&
Wales,
Registration
Number
07936886
45
King
William
Street,
London
EC4R
9AN
Tel:
+44
(0)
203
102
6750
enquiries@vedanvi.Com
www.vedanvi.com
3

4. 4
Investment
Based
Crowdfunding
6. Crowdfunding
is
set
to
grow
significantly,
and
its
clear
from
the
research
highlighted
above.
Any
restrictions
on
investors
entering
this
market
have
to
be
done
with
great
care,
ensuring
that
regulations
don’t
unintentionally
stifle
innovation
and
growth.
7. We
would
like
to
bring
to
emphasise
one
of
the
consumer
protection
objectives
in
the
2012
Financial
Services
Markets
Act,
which
stipulates
that
consumers
should
take
responsibility
for
their
own
decision.
Provided
consumers
are
well
informed,
and
treated
with
care,
they
should
be
allowed
to
make
their
own
decisions
without
the
need
for
protecting
them
from
themselves.
8. Crowdfunding
also
opens
a
whole
new
possibility
for
ordinary
investors
to
take
a
stake
in
future
high
growth
business
(with
full
knowledge
of
the
risks
involved).
This
opportunity
was
previously
only
available
to
sophisticated
angel
investors,
venture
capitalists
and
private
equity
firms.
Now,
with
innovation
in
financial
markets,
an
ordinary
investor
could
take
a
stake
in
a
future
Google,
Facebook
or
Instagram,
for
example,
right
at
the
very
early
stages.
This
is
a
major
shift
that
shouldn’t
be
underestimated.
9. We
remain
concerned
about
the
following
key
areas
that
restrict
financial
promotions
to
unsophisticated
investors
under
the
proposed
rules:
• Advice
may
be
unavailable
or
prohibitively
expensive
for
unsophisticated
low
net
worth
investors.
In
this
case,
they
will
be
restricted
to
investing
10%
of
their
investible
portfolio.
• The
FCA
is
already
aware
that
the
term
“net
investible
portfolio”
is
unclear
and
poses
practical
challenges
for
implementation.
Many
so
called
unsophisticated
investors
won’t
have
a
portfolio
and
if
they
did,
most
investors
(let
alone
unsophisticated
investors)
would
find
it
challenging
to
determine
the
exact
value
of
this
portfolio
just
before
placing
their
investment.
•
It’s
not
uncommon
for
investors
to
invest
small
sums
of
money
on
a
platform.
Assuming
someone
is
investing
£50,
the
hurdles
they
would
need
to
cross
seems
disproportionate
given
the
insignificant
risk.
Such
investors
will
want
to
avoid
the
additional
burden
and
may
just
stay
away.
With
the
appropriateness
test,
platforms
themselves
will
be
less
keen
to
take
on
such
small
investors
weighting
processing
costs
against
commercial
benefits
.
Hopefully
this
is
not
what
the
FCA
intended?
If
the
rules
go
ahead
in
their
current
form,
such
small
investors
will
be
opted
out
of
this
market.
•
Investors
diversify
their
risks
by
investing
small
amounts
on
many
platforms.
How
would
the
10%
rule
be
policed
under
such
circumstances?
10. Over
recent
weeks
there
has
been
much
debate
about
whether
the
proposed
regulations
take
the
“crowd
out
of
crowdfunding”.
The
point
about
not
restrictions
on
gambling
has
also
been
well
made
publically.
On
balance,
taking
all
things
into
consideration,
we
believe
there
is
a
danger
of
the
proposed
regulations,
in
their
current
form,
excluding
the
crowd
from
this
market.
11. As
a
first
prize,
we
believe
the
10%
restriction
should
be
lifted
during
a
transition
period
while
the
FCA
closely
monitors
the
development
of
the
market
and
any
consumer
detriment.
A
better-­‐
informed
cap
can
be
put
in
place
if
justified
by
the
evidence
after
the
transitional
period.
In
this
way,
the
industry
would
be
allowed
to
develop
without
any
artificial
or
unnecessary
restrictions
being
imposed.
Its
worth
bearing
in
mind
however
that
the
appropriateness
test
in
such
a
case
may
still
deter
platforms
from
accepting
certain
types
of
retail
investors,
based
on
the
risk
that
they
would
themselves
be
expose
to.
Registered
in
England
&
Wales,
Registration
Number
07936886
45
King
William
Street,
London
EC4R
9AN
Tel:
+44
(0)
203
102
6750
enquiries@vedanvi.Com
www.vedanvi.com
4

5. 5
12. A
second
alternative
could
look
something
like
this:
• By
gathering
market
data,
the
FCA
could
quickly
determine
the
average
value
of
an
investment
on
a
single
platform,
by
retail
investors.
Such
evidence
will
exist
on
loan-­‐based
platforms
as
well
as
rewards
based
funding
platforms.
• Based
on
the
findings,
an
appropriate
de
minimis
amount
could
be
set.
• Anything
under
the
de
minimis
amount
should
have
no
restriction
nor
should
the
appropriateness
test
apply.
Practically,
this
would
mean
that
platforms
could
allow
such
investors
to
invest
without
confirming
the
10%
rule,
nor
would
they
need
to
apply
the
appropriateness
test.
As
far
as
financial
promotions
are
concerned,
such
clients
are
more
likely
to
find
their
way
onto
platforms
out
of
their
own
initiatives
rather
than
being
solicited
by
platforms.
• Such
a
solution,
in
our
view,
would
preserve
the
essence
on
which
the
industry
was
developed
(i.e.
small
amounts
by
ordinary
investors)
and
leave
the
“crowd
in
crowdfunding”
–
• Like
entrepreneurs
that
use
platforms
to
test
concepts
or
“fail
fast”,
the
FCA
could
test
this
proposal
during
a
12
to
18
month
transition
period
and
fine-­‐tune
the
regulation
based
on
more
concrete
information
at
a
later
date.
The
UK
Government
has
shown
great
foresight
and
leadership
in
recognizing
the
economic
benefits
of
developing
the
crowdfunding
industry.
The
FCA
was
courageous
enough
to
allow
equity-­‐based
crowdfunding
on
a
case-­‐by-­‐case
basis,
when
the
USA
had
totally
restricted
such
a
form
of
investment.
Restricting
the
industry
would
in
our
view,
significantly
change
the
shape
of
the
industry
and
restrict
innovation
and
rapid
growth,
especially
at
a
time
when
alternative
finance
is
so
essential
for
the
economy.
We
therefore
hope
that
the
FCA
will
adopt
a
more
open
approach
to
allow
this
fledgling
industry
to
blossom
and
grow.
Please
contact
us
if
you
would
like
to
discuss
any
of
the
above
in
more
detail.
Yours
sincerely
Jay
Tikam
Director
Vedanvi
Ltd
Registered
in
England
&
Wales,
Registration
Number
07936886
45
King
William
Street,
London
EC4R
9AN
Tel:
+44
(0)
203
102
6750
enquiries@vedanvi.Com
www.vedanvi.com
5