UK crowd gets the best of both worlds

The UK crowdfunding market is ahead of other countries when it comes to equity investing.

Craig Peterson looks at how a high profile success story in the US illustrates the benefits for UK investors.

Directors with an eye on funding opportunities may be aware that one of crowdfunding’s biggest success stories, the Oculus Rift, has been hitting headlines and dividing opinion.

The situation actually paints the UK investment market in a very good light, ahead of foreign markets, including the US.

Oculus VR, the team behind Oculus Rift, a head-mounted virtual reality product, launched a Kickstarter campaign in 2012 to raise $250,000, and ended up with almost $2.5 million of investment.

Everyone who put money into the Oculus Rift was completely aware that they would receive a reward (such as a T-shirt or development version of the product) in return for their pledge – that’s how Kickstarter works! Retrospective-dissatisfaction has arisen following Oculus’ acquisition by social media giant, Facebook, for $2 billion!

Some backers now say the Oculus headset they pre-ordered with their $300 pledge is worthless, and they would rather have had the chance to buy equity in the business. Had they been able to do so, that same $300 could have landed them 147 times their investment; a staggering $44,100!

However, at the time of the Oculus Rift’s crowdfunding campaign, selling equity in a business to online investors was illegal in the US. Since the passing of the JOBS Act, progress is being made in the States and things are changing.

In the UK, equity crowdfunding is regulated by the Financial Conduct Authority (FCA) and has been allowed for a number of years. There is also government support through their introduction of tax incentives, such as SEIS and EIS relief schemes.

The opportunity to invest in start up or early-stage businesses is no longer reserved for angel investors and VCs. The FCA’s guidelines mean that suitably-qualified online angels who have demonstrated that they understand the associated risks and rewards – the crowd – also have the chance to get involved from the very beginning.

Rewards and equity sit well together in crowdfunding, especially when the rewards are used to pre-sell products. Often, high levels of pre-purchase can serve to validate a product and business, and can also attract the attention of Venture Capitalists (VCs) and other investors.

On a much smaller scale than Oculus Rift, GrowthFunders listed Lewis Pennicott with his Chop2Bowl innovation. With the introduction of GrowthFunders’ reward function, backers will be offered the choice between pre-ordering a Chop2Bowl (by pledging money in the campaign), and buying equity in Lewis Pennicott Design Ltd, or to do both, through two very separate transactions.

There will be other projects or investment opportunities out there which have the same potential as Oculus Rift. The question now, is will you be able to invest for equity? Well, if both you and the business/product/service are UK based, and you can prove that you understand the risk/reward profile of investing in start-up and early stage businesses in return for equity, then yes.

So what does the future hold for reward and equity crowdfunding? As shown by the reaction caused by those who backed Oculus Rift and feel as though they’ve missed out in having the chance to buy equity, we’re hopefully now seeing the beginnings of how crowdfunding can drive innovation forward in a more cohesive way. It will be interesting to see what the future holds with crowdfunding at the core of supporting innovation.

Further reading on crowdfunding

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