The BIA today submitted a response to the Financial Conduct Authority’s (FCA) consultation on crowdfunding. These will set the ground rules for both peer-to-peer and investment-based (equity) crowdfunding platforms in the UK in the years to come. How the regulatory framework is set up will have an important bearing on whether this emerging source of alternative finance continues to grow or is stymied.
Given the nature of the funding model for bioscience companies the BIA naturally focused, in our response, on the equity side of things. Investment-based crowdfunding currently represents a small, but growing, source of finance. There is increasing interest amongst start-up companies and spin-outs as to the potential this type of funding could offer, particularly in the £100,000 – £1 million mark. We have seen successful fundraisings using this model in the sector. For example, Cell Guidance Systems raising £290,000+ for 14.55% equity stake earlier this year. We have also heard interest from other BIA members and companies that we talk to about this.
In particular there is interest as to how the “crowd” might act as a co-investor, perhaps coming in alongside an angel investor to complete an early stage fundraising round. In this way, a recognised angel investor may perform some due diligence, investing, for example, 50% of the required capital which could then catalyse the crowds’ co-investment.
Other talked about models include the funding of specific phases of a clinical trial, and again we have seen this in practice already. This would allow investors, perhaps interested in the specific therapeutic area, to help fund a specific trial they have an interest in to help fund the development of a new product.
It is clear that medical research and bioscience represents the riskier end of investment propositions that will be seen on crowdfunding platforms given the lengthy timelines involved and investors will need to be properly aware of the risks involved in such investment. But at the same time the new regulations should not be so strict as to stifle this innovative new funding mechanism before it has had a chance to properly demonstrate its potential. With medical research, investors may very often be motivated not simply by financial returns but also for philanthropic reasons.
In our response the BIA made three key points:
- The approach outlined by the FCA is largely correct and proportionate. It would not freeze out retail investors from the opportunities available but applies some brakes to ensure an individual is aware of the risks involved. A number of these checks can be automated by the platform.
- Retail investors have an interest in supporting innovation. The FCA and policymakers need to be aware that the public want the opportunity to support innovation and they should not be stopped from doing so, provided the necessary safeguards are in place. The interest that the general public has in supporting UK innovation was clearly demonstrated by independent research commissioned by the BIA and articulated through our report on Citizens’ Innovation Funds (CIFs), independent research which demonstrates that almost nine out of ten people who expressed a preference agree that the public should be given the opportunity to invest in innovation.
- Government has a role in supporting retail investment into innovative companies. The government can do more to harness the public’s interest in supporting high-growth innovative companies. Through the Business Finance Partnership scheme’s provision of funding to peer-to-peer lenders the government has shown that it is open to supporting crowdfunding platforms. In keeping with the CIFs model, such support could also be provided through tax incentives for public investment-based crowdfunding, which may also mitigate the risks associated with investment-based crowdfunding for retail investors.