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How is Crowdfunding Regulated for eCommerce Businesses?

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You may decide to raise some funds for your eCommerce business. Perhaps you have a new area of services or a new business you wish to branch out into. Or you might want to sell a large number of new products on your online store. You may even be one of many new small businesses that need capital to get your online store up and running. 

One way you may be able to raise finance for your eCommerce business is through a crowdfunding campaign. However, it is essential to be aware of legal rules when you run a business, which includes crowdfunding rules. This article will explain how the government regulates crowdfunding for eCommerce businesses.

What is Crowdfunding?

Crowdfunding is one way of raising funds for your eCommerce business. It differs from typical ways to raise business finance, such as by taking out a bank loan. Instead, you raise money by creating a crowdfunding pitch and choosing a crowdfunding platform to place it on.

A crowdfunding platform website specialises in helping businesses raise money through crowdfunding. Therefore, you immediately have access to those who like investing in crowdfunding.

It is important to note that your eCommerce brand may choose from different types of crowdfunding. You will want to select the most relevant for your eCommerce business. Whichever you choose, you should note that the regulations for each can differ. In this article, we look at the rules for loan-based crowdfunding and equity-based crowdfunding.

Loan-based crowdfunding is when your e-commerce business receives a loan created through individual pledges. You repay it with interest, which is how the individual investors make money on the crowdfunding. 

Equity-based crowdfunding is where your internet brand offers securities to investors as a share in your business, which they cannot trade. In turn, they pledge money to your internet brand. There are also two other main types of crowdfunding: donation-based crowdfunding and pre-payment or rewards-based crowdfunding. 

How is Crowdfunding Regulated?

Like many forms of raising funds for a business, crowdfunding has rules. The Financial Conduct Authority (FCA) regulates crowdfunding for eCommerce businesses like yours. They provide rules that crowdfunding platforms and companies that crowdfund must legally abide by.

Many crowdfunding platforms also choose to abide by a voluntary code of conduct, the UK Crowdfunding Association (UKCFA). Look for platforms that choose this, as it may help you determine which crowdfunding platform to use.

Loan-Based Crowdfunding

As an eCommerce business raising funds through crowdfunding, you must ensure that the material you create for marketing is fair and accurate. Your adverts, for example, must be honest with potential investors. The same applies to the crowdfunding platform you use to raise funds. 

However, most rules for regulating loan-based crowdfunding place the obligation on your crowdfunding platform. They include the following:

  • to provide transparent information about who they are to potential lenders;
  • that they ensure investors understand rates of return and how they can leave the funding if they wish to, which must be a period of up to 14 days;
  • that investors’ money is with a third party, so separate to their business bank account to protect it;
  • that they guarantee that you will still receive your loan payment even if their crowdfunding platform has problems; and
  • they provide a percentage of funds for loans ready to give a ‘capital cushion.’

Equity-Based Crowdfunding

The rules on regulating crowdfunding are slightly different if you choose equity-based crowdfunding for your internet brand. These apply to the crowdfunding platform you work with. They are in place to protect their clients and ensure they only operate with those they should. The FCA believes that equity-based crowdfunding is a high-risk investment. 

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For equity-based crowdfunding, you can only take investments from investors meeting legal criteria. Your crowdfunding platform will have to ensure this. For example, VCs and high net-worth funders. The people they work with must also abide by rules. These include the:

  • express they understand investment risk or take regulated advice;
  • agree that the most they will invest in crowdfunding is 10% of their net worth.
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Key Takeaways

Crowdfunding is where you raise finance for your eCommerce business with a crowdfunding pitch. You do this on a crowdfunding platform, a website specialising in crowdfunding. There are four main types of crowdfunding, which include equity-based crowding and loan-based crowdfunding. 

The Financial Conduct Authority (FCA) regulates crowdfunding, with different legal rules for various types of crowdfunding. They regulate mainly the crowdfunding platform. Loan-based crowdfunding includes rules such as being transparent about who they are. For equity-based crowdfunding, for example, a crowdfunding platform can only work with investors who meet specific criteria. 

If you need help understanding how the UK government regulates crowdfunding for eCommerce businesses in the UK, LegalVision’s experienced eCommerce lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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