Crowdfunding as an alternative way to raise finance

Crowdfunding as an alternative way to raise finance


As a growing number of investors turn to the residential property market to maximise their returns, innovative investment methods are growing in popularity which allow even those with a small amount of cash to take advantage of the residential asset class.

Providing an alternative way to raise funds, a fairly new phenomenon - known as crowdfunding or peer-to-peer finance - works by pooling small sums from a large number of people, enabling them to collectively purchase property to later sell on for a shared profit. 

The House Crowd is one such company facilitating these collective property investments, stating that investors could earn a “12-14 per cent return … in just a few months” and “on longer buy-to-let projects … a 6 per cent annual dividend (net of maintenance, repairs, management and all other costs) plus a share of profits upon sale.”

According to The House Crowd’s website, the investor will purchase shares in an SPV (Special Purpose Vehicle) which is then used to buy a specific property the investor has agreed to fund – either a short term refurbishment and sell or a long term buy-to-let.

The House Crowd states that the “…profit is derived from the work we do and the value we add.  It is not dependent upon any increase in general property values.”

The Government has recently signalled its approval for alternative means of fund raising, specifically for those financing business start-ups and SMEs, which could suggest that crowdfunding is a viable option to providing much needed liquidity in today’s economic climate. 

Some groups have even lobbied for the Government to implement changes in legislation to overcome regulatory restrictions in order to make crowdfunding more widely available to both investors and those requiring finance. 

Funding models like these have, however, been the subject of FSA scrutiny in recent weeks, following the regulator’s warning that “Many crowdfunding opportunities are high risk and complex.”

Whilst the FSA recognises that “Some crowdfunding platforms promote the potential for higher returns than generally achieved on mainstream investment products … a crowdfunding investment is likely to come with greater risk and higher returns are rare.”

It has therefore concluded that, “most crowdfunding should be targeted at sophisticated investors”, warning that, “investors in a crowdfund have little or no protection if the business or project fails, and that they will probably lose all their investment if it does.”

It added: “We are also concerned that some firms involved in crowdfunding may be handling client money without our permission or authorisation, and therefore may not have adequate protection in place for investors.”

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