The Financial Conduct Authority has begun a crackdown on crowd funding investment schemes that see investors diving into unregulated share offers.
Odin, a service that helps private companies pool investments, has revealed that the regulator had told it to stop taking on new customers until it changes its operating model.
“The FCA has come to the view that deal syndication on a software platform like Odin’s requires a specific regulatory permission (arranging deals with retail investors) that we do not have,” the company said in a statement.
“Neither, to our knowledge, do any of our primary competitors in the UK.”
In the digital age, many start-ups are turning to the internet to fundraise for their new companies, issuing shares online in exchange for funding.
Companies will sell shares privately, which is not covered by regulation, but promoting an offer to the general public is regulated, as well as “arranging deals in investments”.
Odin provides administrative software and services to these investment deals, which it said would be going on without them, such as “via lawyers and email”.
“We’re basically tying together a number of previously independent products and services. We put them in one place and make it all work seamlessly with software,” said the company.
“There are a number of exemptions from regulation that, our lawyers advised, we were able to benefit from. However, the FCA has taken a different view.”
The UK Crowdfunding Association, which represents regulated investment platforms, said there had been “an alarming rise in the number of founders seeking to raise finance directly from the public via what appear to be unregulated share offers”.
“Investments worth potentially millions of pounds are being sought from small investors who run the risk of investing without the protections available via a regulated investment platform,” Bruce Davis, a founding director of the association, told The Times.
“Promoting financial services without the approval of someone authorised by the FCA is potentially criminal,” said the FCA.
“Anyone seeking to invest should make sure they understand the opportunity and the risks involved. They can also check our register to ensure they’re dealing with a financial firm regulated by us.”
In January, the watchdog warned investment-based crowdfunding platforms that they would be taking a closer look at the financial resilience of their businesses, as well as cracking down on companies not complying with consumer duty regulations.
“As a board you are responsible for the governance and oversight in ensuring your firm meets its regulatory requirements and expectations,” said FCA director of consumer investment Lucy Castledine.
“Data from submitted regulatory returns indicates financial resilience is a real issue facing firms in the crowdfunding portfolio, with income streams being inconsistent or ‘lumpy’, putting firms’ business models at risk of being financially unviable,” added the FCA.