Fancy crowdfunding? Here’s what you need to think about

From being seen as a way for small businesses to obtain direct support from consumers or finance that was not forthcoming from banks, crowdfunding has changed beyond recognition. Although still a popular way for startups to obtain finance and support, businesses of all sizes have realised that crowdfunding is not only a way to attract investment but to market their brand. The UK alternative finance market is expected to be worth £4.4 billion by the end of 2015 and shows no signs of slowing down. Here Paula Skinner, one of Scotland’s leading legal advisers on crowdfunding, outlines key points to think about when considering a crowdfunding campaign.

Types of crowdfunding

Broadly speaking there are four main types of crowdfunding; donation-based, rewards-based, equity crowdfunding and peerto- peer lending. Much of the growth, publicity and large deals have come through equity crowdfunding.

Crowdfunding Platforms

There are a host of different platforms, which either focus on one type of crowdfunding or offer different options. The different platforms will charge different fees. This might be a percentage of the amount received by the company through the campaign, or a flat fee eg legal fees.

Equity crowdfunding

Companies should approach equity crowdfunding in the same way as they would approach any form of investment as every platform will carry out a level of diligence on the company. This is done to ensure that the company has no gaping holes in its history and that it is likely to be successful in its campaign. Simply put, you need to be investor-ready. It is important for a company to be prepared for this and to ensure that can support any statements it plans to make in its pitch - it is likely that potential investors who are looking to invest will query these statements.

In addition, different equity sites have different legal structures so it is vital that you take advice as regards the different platforms and the impact these could have on your business. You may wish to consider whether or not you want the ‘crowd’ to have voting rights in the company, and whether the company articles of association need to be tweaked so as to include transfer provisions and any other more bespoke terms. As legal advisers, we work with businesses to identify any changes or terms which they may look to include.

Protecting your business

Crowdfunding will not suit everyone. It is important to understand that there is a possibility that someone else could use your idea once it is out there. Many businesses decide that the marketing exposure that they receive will outweigh this risk, however it is worth considering whether or not you need to protect some of  your ideas, particularly around intellectual property, and to take advice on this at an early stage.

Running the campaign

Momentum plays a key role in a successful crowdfunding campaign. Having different investors, including family and friends,  lined up when you launch will spike interest from other potential investors. A crowdfunding campaign involves a lot of work and it is therefore important to ensure that as many people as possible are pushing the campaign forward to ensure a successful outcome.

Paula Skinner
Partner, Harper Macleod LLP
Start up, growth & investment team
Contact: 0141 227 9271
paula.skinner@harpermacleod.co.uk