Crowdfunding has become a popular way for startup companies to raise capital and launch new products.
With this successful equity raising model moving from the US to the UK, the Financial Services Authority (FSA) has published a briefing note for investors, warning of some of the potential dangers.
It is worth noting that crowdfunding should be viewed as a high risk investment.
Whilst the investment amounts are often very small, at starting levels at least, there is no guarantee you will ever see the money again or receive any of the intended returns.
Crowdfunding is rarely a regulated investment, which means that investors receive no protection from the Financial Services Compensation Scheme (FSCS), should things go wrong. There would also be no recourse to the Financial Ombudsman Service (FOS) if you had a complaint.
For these reasons, crowdfunding is probably not a sensible investment for the majority of people.
It can play a role in a larger, well diversified portfolio for sophisticated and experienced investors. It can also be something that is nice to do when you are passionate about the company or product you are funding, as long as you manage your expectations about the security of your cash and any likely returns.
With traditional sources of raising finance remaining challenging, crowdfunding is likely to become a more mainstream investment option in the future.
Photo credit: Flickr/James Cridland
