The Crowdfunding 101 blog series will bring you bite size pieces on key topics surrounding this revolutionary approach to raising finance. Drawing from the knowledge and expertise of our valued partners and collaborators, including those who have worked with us to deliver our recent Raise Impact Crowdfunding Accelerator, the series will cover key topics within the crowdfunding landscape.
Our first post is by Jeff McGeachie, Corporate and Commercial Lawbrief at online legal service, Lawbite, on the legal issues surrounding crowdfunding:
Crowdfunding is an increasingly popular and great alternative to traditional forms of raising finance for your business. As it is still relatively new, however, it’s important to understand that the term covers a range of legal relationships and serves a variety of purposes.
There are three main crowdfunding relationships: (i) equity; (ii) debt; and (iii) rewards or donor-based.
An equity campaign involves the buying of shares and is a way for the crowd to benefit from the growth in capital value of a company.
Debt funding (or crowdlending) involves the making of loans. The crowd are assuming that the company will pay back the loan over time and will receive interest.
A rewards/donor campaign is where the company or recipient is not necessarily offering a capital reward, it just wants money to complete a (generally) socially useful project.
(i) Equity funding/investment based funding
Whenever a company offers to sell its shares to the public there are a raft of legal issues that arise. The most important of these is the regulatory aspect. Someone has to be authorised by the FCA to sell shares to the public so look carefully that this is the case before investing.
Equity transactions can be made with the benefit of SEIS or EIS status. SEIS is a form of tax relief (both income and capital gains) available to startup companies to a maximum of £150,000. The income tax relief is currently 50% of the investment and the company can take in a maximum of £150,000 in total SEIS investment from UK taxpayers. There are other conditions which apply. EIS is for more mature companies and involves 30% tax relief to a maximum investment of £1,000,0000 from UK taxpayers.
There is a 14 day cooling off period. This is the time period provided in the legislation during which a consumer can decide to walk away from the contract.
This is regulated activity also known as debt based, lend to save or peer to peer lending. Any platform offering lenders the opportunity to lend has to obey certain rules designed to ring-fence lenders’ money if the platform itself becomes financially troubled. There are strict rules requiring the risks of the deal to be properly disclosed.
Points to think about are: how much is being lent, what is the rate of interest, when is the loan repaid and are there any assets the lender(s) can go after if the company is not able to repay the debt.
Again, there is a 14-day cooling off period.
SITR – Social Investment Tax Relief
It should be noted here as this can be applied to both equity and crowdlending, that a new form of tax relief similar to EIS tax relief has been introduced to encourage investments in socially and environmentally responsible investments. This is called Social Investment tax relief (SITR for short). This relief was introduced in April 2014 so, as it is relatively new, its impact has yet to be determined. However, anything which is supports these kinds of social and environmental businesses is gratefully received. You can find out more from the government website here.
(iii) Rewards funding
There is not so much in the way of regulation here save for the usual rules that the purpose must be made clear and the funds utilised exactly as advertised. The principal risk is fraud and anyone pledging money (i.e. Making a promise to provide funds) needs to go into the project with his or her eyes wide open.
Jeff McGeachie, Lawbite
LawBite is an online legal service providing simple law for small companies. Impact Hub Westminster members receive 10% cost saving for LawBite legal documents and their Unlimited Access Subscription, 2 x 15 minute free advice on company/business law (by phone or through the LawBite platform), free access to a growing resource of LawBite Academy reference material and legal guides. Find out more here.
Photo credit: Joe Shlabotnik, Flickr