How is Property Crowdfunding Regulated?

Property crowdfunding is a relatively new industry to the UK, but has proven itself to be a tangible alternative to other indirect investment models, such as Real Estate Investment Trusts (REITs) or buying shares in listed property companies. As with any emerging investment trend, there are cautions to be considered, and property crowdfunding is regulated with this in mind to protect consumers.  

The Financial Conduct Authority (FCA) is the regulatory body responsible for overseeing certain types of crowdfunding in the UK. It has been tightening up regulation surrounding all types of crowdfunding in its latest announcements, and states that its goal is to protect consumers who invest on platforms, allowing them to invest in shares or debt securities.

What kind of crowdfunding is regulated?

There are different types of crowdfunding methods, but not all are covered by the FCA’s scope of UK law. Currently, the UK does not regulate donation-based or rewards-based crowdfunding, which in a sense first made the industry famous.  

While donation-based crowdfunding has been used to gather large pools of money for charities and virtuous causes, rewards-based crowdfunding offers investors a small reward as compensation for their contribution. This could be free merchandise, early purchase opportunities or event tickets.  

When we talk about property crowdfunding however, we usually mean equity-based crowdfunding where investors actually gain a share in the business that is raising the funds. Similarly, debt-based crowdfunding can offer investors long-term benefits in the form of interest payments, as investors are classified as lenders. Both these crowdfunding models must obtain a license and conform to standards set out by the FCA. Equity investments are riskier, and as with all investments, returns are not guaranteed.

How is property crowdfunding regulated?

According to the consumer protection rules for investment in securities through crowdfunding initiated by the FCA in 2014, crowdfunding platforms are limited in their marketing efforts to potential consumers who meet specific criteria.  

This restricts offers and communications to those who qualify as high net worth or sophisticated investors and those who confirm they will invest less than 10 per cent of their net assets. The FCA’s rules also require crowdfunding firms to check whether customers understand the risks related to their investment if they do not already take regulated advice.  

In the FCA’s review of the regulatory regime for crowdfunding published in 2015, it stated that their supervision of the market involves regular monitoring of crowdfunding websites and management information (MI) to ensure that only appropriate types of customers were allowed to invest, and that “financial promotions are clear, fair and not misleading”.

According to the 2016 FCA interim feedback statement, firms must seek authorisation from the FCA before they can provide regulated financial services. Ultimately, property crowdfunding businesses looking to enter the industry must pass an authorisation process designed to protect consumers and market competition. This includes submitting a suitable and detailed regulatory business plan, and confirming that management boards have adequate knowledge and experience of the financial regulation surrounding the industry.

More changes to come?

As mentioned, the regulation surrounding property investment crowdfunding is relatively new in accordance with how young the industry is in the UK. Therefore, it’s likely that the FCA will continue to review the industry as it progresses, in order to inform its future regulation. As mentioned in the FCA’s 2018/19 business plan, new rules may be announced for consultation in FCA’s 2018 report. New rules might involve more clarity and transparency for consumers, and more accessibility to information related to specific crowdfunding schemes. This will likely increase the market’s ability to operate competitively, as investors will be able to compare deals before committing.

Is crowdfunding safe?

As with any investment model, there are a number of innate advantages and disadvantages to the process. Putting money into a real estate crowdfunding campaign, as opposed to REITs, has many benefits; however it is clear that the industry regulation is still young and evolving. Crowdfunding as an investment strategy can be a riskier activity than more traditional investing, such as REITs, and the returns are not guaranteed.

While the potential for investment returns have attracted new consumers to the sector, anyone entering the property crowdfunding game must pay attention to how the accompanying regulation evolves in step with growing opportunities.