Understanding crowdfunding

What is crowdfunding?

Crowdfunding is a way for you to invest in opportunities that may not be available through more traditional options. While there are benefits, it’s important to research each opportunity before you invest. 

The different types of crowdfunding 

There are different types of crowdfunding opportunities you can invest in. Some are regulated by us, some aren’t, so it can be useful to understand the different types.  

Regulated by us:

• Loan-based (peer-to-peer): Peer-to-peer crowdfunding connects people who want to borrow money directly with those willing to lend it. This is often through an online platform. You lend money to a borrower and receive repayments over time, usually with interest. The platform takes a fee for arranging and managing this.  
• Investment-based: This type of crowdfunding enables you to invest in a business by buying shares or investing in business-backed loans. The more you invest, the bigger your stake in the business. These opportunities usually involve small or medium-sized companies that aren’t ready to be listed on a stock market yet. Some of the best-known examples are tech-driven challenger brands.  

In some circumstances where the crowdfunding activity is not regulated by us, we do regulate the payment services. This means your payment may be protected by regulation, but if the crowdfunding project fails or doesn’t deliver, you’re unlikely to be protected. 

• Donation-based crowdfunding: This type of crowdfunding is usually aimed at furthering a cause, rather than producing a financial return. As a crowdfunding supporter you donate sums, large or small, through an online platform, then the donations are pooled to finance a project with a collective stated goal.  
• Rewards-based or pre-payment crowdfunding: This type of crowdfunding is for those looking for a specific benefit in a product, rather than financial return. This means that if you pay into reward‑based crowdfunding, you’re called a contributor rather than an investor. The reward isn’t guaranteed but if things go well, you might be first in line to receive a particular new consumer gadget, like an e-bike, that was developed in part using their crowdfunded contributions.

How does crowdfunding work?

Crowdfunding platforms are websites or apps designed to match you with businesses or people seeking investment. These platforms enable businesses to explain the project, cause or investment opportunity, and allow you to invest your money. The websites or apps typically charge the company raising the money a fee (usually a % of the funds raised) if the crowdfund hits its target. Generally, they work on an all-or-nothing basis, meaning that if the total raised falls short of the pre-set target, then the funds are sent back to you in full, with no fees or deductions. 

Benefits of crowdfunding

There are many benefits that can be offered by investing in a crowdfund: 

• For investors: Crowdfunding can be empowering, giving you the opportunity to invest in something you truly believe in, where your investment can make a real difference.  
• For your returns: Crowdfunding investments can offer higher potential returns than savings accounts and other less risky investments, but those returns aren’t guaranteed. Higher rewards usually come with higher risks, including the risk of losing your money. 
• For businesses: Crowdfunding is a low-cost way for small businesses to raise money and grow their business. It can also be a great means of engaging with you directly, helping to build a community around the project or investment and even get fresh and direct market insight about what you want.  

Risks of crowdfunding

Crowdfunded investment opportunities are higher-risk investments. The level of risk varies depending on the platform and the type of opportunity you choose, so it’s important to check each one out when investing.  

Specific risks of crowdfunding include: 

• Crowdfunding may look attractive because it offers the potential for higher returns than other investments, but those returns aren’t guaranteed and your money may be at risk. 
• If the company you’ve invested in fails, you might lose all the money you have invested. This is a key consideration for crowdfunding opportunities, as many companies seeking crowdfunding are in their infancy and are at a high chance of failing. Even where they are successful it can take years for you to see a return on your investment. You also may not be able to get your money back quickly, or at all should you need it. 
• Loan-based (peer to peer) or investment-based crowdfunding are high-risk investments, and you won’t have access to the Financial Services Compensation Scheme (FSCS). 
• Some platforms may let you cash in your investment. This is where your investment can be sold to another investor subject to a delay, although you may not get back all of the money you invested. It’s worth noting that not all platforms offer this service. 

Risks specific to Property Development 

Crowdfunding isn't just for start-ups. It can also be used to fund property development. But this type of investment carries additional risks that are worth knowing about: 

• Property development projects carry a higher risk of losing your money if the company crowdfunding can’t complete the project or repay the loan. 
• If you’re investing in property overseas, be aware that different laws apply and currency changes could affect how much you get back. 
• Check whether your investment is pooled. This means your money may be spread across several projects rather than invested in one specific property. 

Thinking of investing?

Prior to investing, check these things first: 

• How the crowdfunding investment works and what you’re putting your money into. 
• That you’re comfortable with the level of risk, including the possibility of losing all the money you have invested 
• Any fees and taxes that may apply to the investment. 

Before you invest in a crowdfunded project or any other investment, use the Firm Checker to confirm that the firms involved are authorised and registered and what they are authorised or registered for.