What is Crowdfunding and P2P Investing?

The idea of crowdfunding is quite simple. Rather than relying on traditional institutions or businesses for funding, it involves raising money from a collective or "Crowd" of individuals. By breaking down larger investments into smaller contributions, it becomes more accessible for everyday investors, reducing dependence on institutional support.

While the idea predates the digital era, today crowdfunding predominantly occurs online, with various digital platforms emerging over the past two decades. These platforms connect those seeking funding with potential investors or donors, creating new opportunities for both parties.

Crowdfunding encompasses three primary archetypes:

Donation-Based Crowdfunding This involves no financial return—rather a charitable donation. Well-known platforms like JustGiving or GoFundMe operate on this model. Donors contribute to causes they care about without expecting anything in return.

Rewards-Based Crowdfunding Supporters don't receive financial returns, but they do receive non-financial rewards, such as a product or service related to the project. Notable examples include Kickstarter and Indiegogo, where backers often receive early access to innovative products.

Investment-Based Crowdfunding This mirrors traditional equity or debt investments, funded by a group of individuals. This category includes equity-based crowdfunding and loan-based crowdfunding. As these investments typically aren't traded on exchanges, they fall into the realm of alternative investments.

Other., as an investment platform, exclusively focuses on investment-based crowdfunding—the type that offers potential financial returns.

Investment-based crowdfunding, also known as crowdinvesting, represents a subset of crowdfunding that establishes an investment-like relationship between the investor and the business or individual receiving the funding. This stands in contrast to donation-based or rewards-based crowdfunding, where a financial return is absent.

Due to the non-listed nature of these investments, crowdinvesting typically falls under the broader category of alternative investments or private investments. Similar to other investment types, crowdinvesting can be categorised into equity and debt investing.

Key Terminology

While crowdinvesting and peer-to-peer investing (P2P) are often used interchangeably, there are subtle differences:

• **Crowdinvesting** is more commonly associated with equity investments
• **P2P investing**, particularly P2P lending, leans toward a debt context
• Terms like **loan-based crowdinvesting** or **crowdlending** describe the same business model within the debt context

Although there are similarities between equity-based and loan-based crowdinvesting, notable differences exist between the two, which we explore in dedicated guides.

In the UK, the FCA regulates both loan-based and equity-based crowdfunding but does not regulate donation-based and reward-based crowdfunding. Many of the rules relating to crowdfunding came into force in 2014. Although some issues are common to both loan-based and investment-based crowdfunding, the two types are regulated in different ways.

Loan-Based Crowdfunding Regulation

Loan-based crowdfunding started life as a particular class of consumer credit activity. In 2013, it was added as a new regulated activity under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO).

Under Article 36H of the RAO, loan-based crowdfunding is referred to as "operating an electronic system which enables the operator to facilitate persons becoming the lender and borrower". Platforms must adhere to various rules including the FCA's Principles for Businesses (PRIN), Systems and Controls (SYSC), Conduct of Business (COBS) and Consumer Credit (CONC) sourcebooks.

Investment-Based Crowdfunding Regulation

Unlike loan-based crowdfunding, investment-based crowdfunding does not constitute a standalone regulated activity. Instead, it is caught by existing activities under the RAO, including "arranging deals in investments" and "making arrangements with a view to transactions in investments".

One reason for this difference is that equity crowdfunding models are generally simpler than loan-based models, which tend to be more complex and take a more active role in facilitation.

Recent Regulatory Developments

In 2019, the FCA set out a new policy position around crowdfunding, including: - Minimum information requirements for P2P platforms - More explicit governance and control requirements - Strengthened rules on wind-down of P2P platforms

In 2022, the FCA published new rules on marketing high-risk investments that apply to crowdinvesting.