Crowdfunding and EIS: A Marriage

Married couple drinking champagne

Another Crowd offers comment, analysis and news on the most exciting areas of British, and indeed global, finance, crowdfunding.

As the site launches, Forbes.com publishes a blog by David Prosser which pretty much perfectly sums up our philosophy, and the reason why we are positioned where we are.

First of all, this is a very exciting, fast-growing market: "On a global scale, the crowdfunding sector continues to go from strength to strength, but in one particular niche of the industry, Britain has a genuine claim to be a world leader. It remains one of only a handful of markets where equity-based crowdfunding is thriving," writes Prosser in Forbes.com.

The process may be more long-winded than many in the sector would like, but it gives a certain legitimacy to those platforms that make the grade

Crowdfunding is a mechanism for bringing people together with others (people or companies) seeking loan funding or equity investment (instead of a loan, the person giving the money gets a stake in the business).  Crowdfunding is broader than equity and loan funding. It also works as a mechanism for charity and other, specific, non-financial purposes.

"It’s also the case that the equity crowdfunding model has struggled to establish itself given the inherent risk of putting money into small businesses – even a portfolio of them – with no foreseeable prospect of a return. Loan-based crowdfunding, by contrast, has thrived in an economic environment where investors are desperate for the income profile it can offer," adds Prosser.

"In the long run, however, it’s the equity-based model that offers investors the greatest potential for stellar returns. While many of the companies on these platforms may never make it big, or even fail altogether, investors only need a handful of big winners to cash in."

Other commentatros have described the "Perfect Storm" for creowdfunding - low interest rates (making crowdfunded yields attractive), banks' reluctance to lend, public distates for bansk, a wider demographic of acceptance of the internaet as trusted medium for comment, and conveyance of credit. And then there's the UK regulatory ebvironment.

"The UK is fortunate in that it has a proscribed regulatory process through which equity-based crowdfunding platforms can seek authorisation to trade," says Prosser. "The process may be more long-winded than many in the sector would like, but it gives a certain legitimacy to those platforms that make the grade – and gives them the right to talk to investors.

"The UK government’s seed enterprise investment scheme (SEIS) is also a huge bonus. The SEIS, which offers incredibly generous tax breaks to investors in start-up companies, wasn’t designed with crowdfunding platforms in mind, but the vast majority of businesses pitching on the platforms qualify for the scheme."

Enterprise Investment Schemes and Seed Enterprise Investment Schemes exist in the commercial world only. EIS and SEIS companies are able to offer a tax break, sanctioned and approved by HMRC, for its trading activity. The investor will receive a tax rebate against otherwise payable Income Tax. EIS and SEIS, unlike crowdfunding, are not mechanisms for delivering funding, but tax incentives to encourage investment into qualifying companies.

As a result of these factors, the UK now offers no fewer than four equity-based crowdfunding platforms with authorisation to do business from the Financial Conduct Authority. They are CrowdcubeSeedrsSyndicate Room, and Volpit.

More, much more to come. Watch this space.