crowdfunding-guide

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crowdfunding-guide

1. INTRODUCTIONThis E-book is intended for people based in the UK and running orwishing to set up a Crowdfunding platform (“CFP”) and who want tofurther their understanding of the legal, fiscal and accountancy issuesand to adopt the appropriate legal structure.The dramatic proliferation of CFP is largely due to the economic crisis.Banks, VCs and other institutions are now loath to lend to pre-revenuebusinesses. Angel investors are inundated and reject 99% of theapplications they receive and demand a big slice of equity from the 1%in which they are interested. “Friends and Family” are wary and havelittle if any spare cash.The continued financial depression and lack of growth plans on bothsides of the Atlantic are making the difficulties of funding more acute.Life is also tough for investors as banks typically offer unattractive ratesof interest. At the same time, the development of the internet and socialnetworks has reduced degrees of separation from six to fewer thantwo, and considerably increased potential marketing reach.Crowdfunding may offer a potential escape from both of these keyissues.To date, the vast majority of CFP is not authorised by the FinancialConduct Authority in the UK. In short, this means that investors are notprotected if the business in which they have invested via the CFP fails,unless effective protections similar to the regulatory ones have beenbuilt in contractually. Whilst debate rages about the need for CFP to beauthorised, there can be little doubt that investors would be wise tochoose those CFP that are, investors will becoming increasingly aliveto this issue as stories of failed CFP investments spread and that thosesetting up CFP should therefore carefully consider getting themselvesauthorised to survive the CFP Darwinian process that will doubtlessensue.1.1 Brave New WorldThe rush to set up CFP is at full gallop. Every month new CFP emerge.There are different legal structures (see Section 5 below) and differentinvestment return models (see Section 2 below) and often theimplications of selecting one option over others are not wellunderstood.Whereas certain CFP are dedicated to specific sectors and/or areas ofactivity, others are agnostic ranging from children’s nurseries to raisingfunds for a concert tour by a new pop group. However, all CFP areon-line platforms connecting those seeking to raise funds with potentialinvestors using a low-cost and generally transparent model.In this E-book, we set out some general guidelines, and highlight someof the major pitfalls and issues a CFP needs to consider in order toachieve the best outcome.There is much ignorance in the marketplace regarding both CFP andentrepreneurs setting up CFP, and those intending to raise funds viaCFP should seek guidance from professionals dealing with theseissues on a daily basis.1.2 Choosing Professional AdvisersSetting up a CFP entails a multitude of decisions, decisions which canseem overwhelming without the right professional advice.The right accountant and solicitor can eliminate a host of problems andpotentially costly errors a CFP might make as it builds the financialfoundation of a successful business. Their expertise can help savemoney that in turn can be used to increase profits.One should enlist the expertise of an accountant and solicitor whospecialise in the CFP area and will be able to devise strategies tofacilitate success.1