Tahir's Tips: Crowdfunding from a Legal Perspective Cont.

Currently, there is little regulation on crowdfunding as only the equity-based platforms are carrying on a regulated activity and are therefore required to be authorised by the Financial Conduct Authority (FCA). However, the UK Crowdfunding Association (UKCFA), a self-regulatory trade body set up by several UK crowdfunding platforms, does have a code of practice in place, but it is worth baring in mind that membership to the UKCFA is optional and not a requirement. 

In recognition of the recent rise in crowdfunding and the risks associated with it, the FCA has been consulting on how crowdfunding should be regulated. This has culminated in a policy statement released on the 6th March 2014. With regards to debt-based crowdfunding, the policy statement includes provisions relating to conduct of business (especially around disclosure and promotion), client money protection rules, dispute rules and a requirement to take reasonable steps to ensure existing loans continue to be administered if the firm goes out of business. The final rules are due to come into force on the 1st April 2014.

There are a number of legal issues that should be considered before trying to raise money through a crowdfunding platform. With this in mind, here are my tips (most of the points below are relevant to equity crowdfunding):

1. Think carefully about which crowdfunding platform is most suitable to your project. The crowdfunding platform you choose will not only have an impact on your chances of success but also the fees you pay. You should think about things like what market you are targeting and whether you are willing to give away parts of your business in exchange for funding.

2. Make sure any crowdfunding proposal complies with financial promotion legislation.

3. It is important to consider whether disclosing your business or product before it has been released or made would be detrimental to the protection of associated intellectual property rights.

4. Any crowdfunding promotion must comply with the company’s articles and any shareholders agreement that may be in place.

5. There are a whole host of issues that arise simply through having a large number of new shareholders in the company. It may be necessary to create new classes of shares for the new shareholders and it may be necessary for the new shareholders to become parties to a new shareholders agreement that is separate to the one signed by the company’s founder shareholders.

6. It is important to consider the effect that a large number of shareholders may have on any future investment round as investors may be put off by such a large number of people involved.

7. Higher standards of corporate governance will also be required to accommodate a large number of shareholders who are based in different jurisdictions.

8. Be prepared. There may be an increase in company secretarial work that will be required to deal with the administration tasks associated with a large influx of new shareholders.

Fashion start-ups and designers can certainly benefit from the pre-sales models of crowdfunding platforms like Kickstarter, particularly when there is already a customer base that can be marketed to via the crowdfunding platform. Whilst the visibility that crowdfunding offers is great, the crowd might not really understand your business and if they do not fund then you will be a visible crowdfunding campaign which has not succeeded.

This is the second installment of a two-part series on crowdfunding. To read part one, where Tahir looks at the different types of crowdfunding models on the market, click here.

For more information on Industry member, Tahir visit his personal partner page on the Sheridans website. To contact him directly, visit The Industry Directory, email [email protected] or telephone 020 7079 0103.