Sound of the Crowd

General Papers and Articles

Is there a future for crowd funding in the UK as an alternative way to fund property development?

Crowd funding works on the principle that instead of raising finance from banks or wealthy private equity investors, you raise the money from hundreds, or even thousands, of small-scale investors.

The way to do this (simply put) is first set up or join a crowd funding platform – a website – and post details of your business plan (which will include property details and target amount to raise). You then hope for members of the public to pledge varying amounts of money, which you use to buy and develop the property. If the target isn’t met, that’s usually the end of the story and the would-be investors’ money isn’t transferred.

The crowd funding platforms themselves usually make money by taking a cut of the total investment, or by charging a fee. There are no banks involved.

It’s already big in America – both North and South. In Columbia a 66-floor mixed commercial/residential skyscraper – BD Bogota -has been funded by more than 3,500 people together raising over $200 million – a world record in crowd-funded real estate.

US platform Realty Mogul recently used $15.2 million of crowd funding to buy a 133,600 square feet shopping centre in Monterey, California – less than 6 hours after it began taking money online from investors. Other investors were involved too – so crowd funding can be just a part of the mix.

Can this work in the UK?

One high profile crowd funding deal that’s already happened here is Hab Housing, founded by Kevin McCloud of BBC’s Grand Designs. This recently raised almost £2 million on the Crowdcube platform, meeting its target of £1 million in only 46 days. It plans to build environmentally friendly homes at affordable prices.

The problem here is a lack of regulation. The US has the Jumpstart Our Business Start-Ups Act 2012 (known as the JOBS Act) – which, amongst other things, sets limits on what individuals can invest and deals with regulatory, disclosure and advertising matters. Here crowd funding must comply with the Consumer Credit Act but it isn’t yet regulated by the Financial Conduct Authority.

Without an over-arching piece of legislation, crowd funders are having to navigate their way through a myriad of different legislative requirements covering company law and investment not specifically designed with crowd funding in mind. This is deterring investors.

The legislative framework looks set to change however.

By Jon Dickins, Consultant, Stepien Lake. This article first appeared on Jon’s blog ‘Digging the Dirt’ (www.jondickins.com) which covers property, planning and environmental law.