Crowdfunding is a relatively new concept, but could it play a part in funding future construction projects? Holly Squire investigates
With banks seemingly still reluctant to go overboard on funding, the idea of getting a huge number of people to contribute smaller amounts of money towards a total that is still impressive has really taken off.
Crowdfunding, as this process is called, is all about cutting out the middle man and allowing small businesses to get the funding they need without banks taking a slice of their margins in fees. For savers, these ventures often offer the potential for much greater returns. Some £28m was raised through equity crowdfunding in 2013 in the UK alone.
Until recently, financing a business, project or venture involved asking a few people for large sums of money, but crowdfunding switches this idea around, using the internet to talk to thousands – if not millions – of potential funders. It is essentially a way of raising finance by asking a large number of people each for a small amount of money.
The actual process of doing this varies, and includes reward-based, equity and debt, donation-based for a non-profit, peer-to-peer fundraising and charity for an individual.
But is crowd funding a sensible way to fund a construction project?
Real estate crowdfunding is becoming more and more popular in the USA, with hoards of websites solely devoted to crowd funding property.
The website Fundrise has seen developers use the platform to close investments for more than a dozen projects totaling more than $10m; with money currently being raised for four projects, in Austin, Texas; San Francisco; Philadelphia and Brooklyn. When those projects close, the total raised through Fundrise could top $12m.
Civic crowdfunding, which sees local communities club together to tackle local issues, is also a growing phenomenon, particularly where potholes are concerned. In Rotterdam civic crowdfunding has taken place on a large scale with residents crowdfunding a bridge to help join two halves of the city back together. Modern development had cut off a pre-war thriving core of Rotterdam from the rest of the city, and officials said a connecting bridge would take 30 years to finance. So a team of young architects decided to crowdfund it.
More than 1,300 planks later, each one stamped with the sponsor’s name, the first 18 metres of the wooden Luchtsingel bridges two downtown halves of Rotterdam.
Back on UK soil, the sustainable housing developer Hab Housing, founded in 2007 by Kevin McCloud, has successfully raised just under £2m on the equity crowdfunding platform Crowdcube.
Having extended its pitch after meeting its original £1m target in 46 days, it overfunded by 90% – making it the biggest amount ever raised using an equity crowdfunding platform.
A total of 642 people are shareholders in Hab Housing, with investments ranging from £100 to £150,000.
“We find it gratifying that so many people have joined Hab’s merry band of shareholders,” says founding McCloud. “From day one, Hab has been fuelled by passion, commitment and vision, and although it has felt lonely at times we now feel vindicated and invigorated by the backing of the people who have thrown their encouragement and financial support behind us.”
Those investing in Hab Housing are eligible for the Enterprise Investment Scheme (EIS), which offers income tax relief of up to 30% on the amount invested and no capital gains tax on disposal.
As well as now owning a combined share of 26.31% of the equity in its business, Hab Housing aims to offer investors a 5% dividend by the end of 2016.
“We’re thrilled that an innovative company such as Hab Housing turned to Crowdcube to help it take advantage of the new market opportunity it identified,” says Luke Lang, co-founder of Crowdcube. “Britain is full of people with great ideas and crowdfunding is helping to transform equity finance by giving budding businesses an alternative way to attract investment.”
In a marketplace where many of the investors are behind closed doors and each site has a different set of rules, crowdfunding is of course not without its problems. Crowdcube conducts ID and anti-money laundering checks on all investors but just how well regulated is the rest of the crowdfunding market?
Salvador Briggman, who is based in New York, runs Crowdcrux.com, Kickstarterforum.org, and Crowdfundingpr.org, and believes it depends on the country and the type of crowdfunding.
“Across the board, rewards-based crowdfunding is not very heavily regulated, mainly because there is no exchange of securities like in equity crowdfunding.
“Aside from a personal lawsuit between backers and creator, platforms generally do not regulate whether or not creators deliver on their promises to produce rewards.”
“Equity crowdfunding for every day Americans was recently legalised in the USA, but the specific regulations and rules are still being drafted up and it has not yet been put into effect, but from the first glance, they are pretty strict.”
In the UK, the Financial Conduct Authority (FCA) has followed up on a consultation paper from 2013 with a set of regulations, so that from 1 April crowdfunding platforms will be required to provide “clear information” on the risks associated with lending.
Loan-based platforms will need to introduce plans that allow for repayments to continue if systems go down. Under the FCA’s proposals, “inexperienced” investors will also have to confirm that they’ll not invest more than 10% of their portfolio in unlisted businesses.
“It is critical that equity crowdfunding is more accessible to everyday investors, and the FCA’s confirmed policy on equity crowdfunding achieves this,” says Lang. “The UK leads the world in equity crowdfunding and these changes will help build market confidence, ensuring that the crowd remains in crowdfunding and the industry can continue to flourish.”