Last week (Thursday 6 March) the Financial Conduct Authority (FCA) outlined how they would regulate crowdfunding in the UK from April 2014. This includes both debt-based / loan crowdfunding as well as equity based investment.

It is important to ensure there is a robust but also proportionate regulatory framework for this emerging source of alternative finance. There is obviously a need to provide the public and potential investors with adequate protection and confidence that there are appropriate safeguards in place. However, the nature of crowdfunding is such that it, as the name says, relies on ‘the crowd’ – providing people with an opportunity to invest in things they may not have had the chance to before. Maintaining this public involvement goes to the heart of crowdfunding and, as the BIA argued in its own response to the consultation on the framework, the FCA should ensure regulation does not stifle the industry.

The FCA’s approach appears to strike the right balance between these competing principles. For equity based crowdfunding – which has the potential to be of most relevance to BIA members and equity backed life science companies – the guidelines laid out a clear framework. Individuals who are accredited or advised can invest as much as they like. For others, there will be a limit of 10% of their investible assets per year.

Crowdfunding may not be suitable for all bioscience companies given they are typically at the riskier end of investment propositions requiring larger amounts of capital. However, having alternative sources of finance is important to any sector and there is scope for crowdfunding to enhance and support early stage funding for life science companies, particularly the first fundraisings of early stage spin-outs. We have seen some success in the sector with Cell Guidance Systems raising £290,000 – well over its target – and QuantuMDx, a diagnostics company, currently also raising capital to support its 15 minute malaria/drug resistance test.

CIFs-2-report-cover-webIndeed, for some companies, raising awareness of their innovative research and directly engaging the public with that endeavour might be more important than the capital raised itself. Crowdfunding offers the opportunity to create a more direct link between medical research and development and the ultimate end users. This ‘democratisation’ of the investment process is something the BIA has loudly called for by recommending the introduction of Citizens’ Innovation Funds (CIFs) which would provide a tax incentive to support individuals’ investment into innovation in the UK.

With the regulatory regime now established for crowdfunding, the policy debate should continue to examine how best to involve the public with UK innovation. CIFs would offer one workable and cost-effective solution and a number of other organisations and policymakers are now also calling for government to consider schemes that encourage greater public participation in equity schemes. The investment landscape looks set to evolve further.