The U.K. financial regulator said Tuesday that a review found problems with most British crowdfunding investment websites, such as cherry-picking information and downplaying risks.
The Financial Conduct Authority said that most of the sites, which provide a way for people to invest small amounts in startup companies, quickly responded to the concerns and made changes.
Still, the regulator said it was particularly concerned because 62% of investors in a recent survey said they didn’t have any previous investment experience. There were also other concerning signs, such as evidence that some sites deleted negative comments that could have otherwise warned investors off of a particular company, the regulator said.
The regulator didn’t identify the companies in the review that it found problematic.
Various forms of crowdfunding have taken off over the last couple of years in Europe, including one type known as equity crowdfunding, in which sites connect investors with startups and usually take a percentage of the amount invested. They differ from sites such as Kickstarter or IndieGogo, where people donate or make purchases to fund startups and usually don’t expect to get their money back. Another, much larger form of crowdfunding involves raising money from multiple investors for personal and business loans.
Startups were expected to raise £84 million ($127 million) in 2014 from U.K. crowdfunding investment sites, up from £28 million in 2013, according to a recent report.
At the same time, regulators have been trying to figure out how to protect against fraud.The FCA last year introduced rules with the aim of making sure the risks were clear and marketing was limited.
In the U.S., the Securities and Exchange Commission has been working on long-delayed federal crowdfunding rules. Meanwhile, states such as Georgia, Kansas and Wisconsinhave been trying out crowdfunding on their own.
John Owrid, 54 years old, of London, said crowdfunding seemed the simplest way to raise money for his startup, Sporting Mouth, which is a way for friends to make small, nonmonetary bets against each other. (Think, betting a round of drinks on whether a team wins.)
He was able to beat his goal of £175,000 in a week in March, mostly from friends and family who put in money. But there were others Owrid didn’t know, such as a Swedish investment banker who put in £50,000.
Owrid said he thought the risks were clear. “It would be bloody hard not to know,” he said. “There are very, very stern warnings about investments going up and down, investments being a risk and all those sorts of things. I remember thinking at the time, ‘My God, this is designed to put people off.’ ”
The U.K. review comes as European officials are considering whether to regulate crowdfunding at the European Union level. In December, Europe’s top securities watchdog called for common regulation on crowdfunding.
The watchdog, the European Securities and Markets Authority, highlighted risks for investors and warned that there were “strong incentives” across Europe for crowdfunding companies to try to avoid regulation.
Jeff Lynn, chief executive of crowdfunding company Seedrs, said it is too early to tell what kind of return investors can make. Only 12 companies so far out of 170 funded on his site since July 2012 have gone bust, he said.
But Lynn said that number will almost certainly rise. He said he expects 50% to 80% of the companies that raise money on his platform to fail.
Several executives at crowdfunding companies said they have seen questionable activity at their competitors, such as deleting negative comments made on projects. “We’ve seen that over and over again,” said Gonçalo de Vasconcelos, CEO of Syndicate Room, based in Cambridge, England.
De Vasconcelos said he welcomed some regulation to try to help goose investor confidence, but he said he saw risks to the overall industry from over-regulation.
“That would be just be carnage,” he said. “Then it becomes as expensive to run as a bank, and that’s unsustainable.”