Stuart Wilson

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Rise of the Investment Platform

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crowdfunding

Not so long ago, dealing in shares or investing as a business angel from a smartphone or tablet was unthinkable.

Today, it’s a reality as millions of pounds are traded and invested every day online at the click of a button.

Crowdfunding and investment platforms have revolutionised financial markets and allow entrepreneurs and ordinary people alternative access away from the private walled gardens banks and corporations once erected around business and finance.

The latest figures from City regulator the Financial Conduct Authority (FCA) indicate crowdfunded investments have accelerated 170% to £1.5 billion in the past 12 months, and that fast-forward escalation shows no sign of slowing.

Like many other investors, checking in to see how my shares are performing and scrolling down the latest pitches on Kickstarter and Indiegogo have become part of my daily routine.

Breaking down barriers

Platforms have snatched investing and finance out of the stuffy boardrooms and smoke-filled clubs where business deals were agreed over cigars and a glass of brandy and placed them online where anyone, anywhere with an internet connection can join in.

Tearing down these walls has seen knowledge flow from the few to the many.

Credit is also due to the Tory/LibDem coalition for backing business with tax incentives for investors like the Seed Enterprise Investment Scheme (SEIS). SEIS offers some mouth-watering tax reliefs for ordinary investors, not just sophisticated professionals.

That is proved by investors ploughing nearly £90 million into more than 1,100 SEIS startups since April 2012, according to HM Revenue & Customs (HMRC).

Crowdfunding and investment platforms have proved two points:

  • Like me, ordinary people are interested in savings and investments if they can take responsibility for their money and get involved personally in ventures they are passionate about
  • Technology breaks down barriers and improves choice for investors and removes obstacles for entrepreneurs like cost of entry into a market place and red-tape

Ease of access and simplicity of design that makes pitching and pledging cash straightforward for investors are also part of the success story of crowdfunding and investment platforms.

Cutting through jargon

Banks and financial institution platforms are often complicated, mainly due to shrouding need-to-know information in impenetrable jargon.

Modern crowdfunding and investment platforms are easy on the eye and gently lead the user from log-in or sign up through to the objective – handing over some cash.

Along the way, videos and downloadable guides explain the important details. Most platforms will probably admit the process is still not quite right and the FCA has stepped in to ensure crowdfunders do more to tell prospective investors about the downside to pledging cash, such as the possibility of losing instead of making money.

Platforms are still in their fledgling stage and these teething problems are relatively minor issues that will fade as the market matures.

Smartphones and tablets have really made a difference to platform investing.

Apps make keeping track of investments and opportunities accessible at any time, while scanning social media and the web for information while on the move frees investors from traditional site-locked media channels, such as the TV, print and radio.

What is crowdfunding?

Crowdfunding is like a busy market where entrepreneurs pitch their stalls for a huge number of willing investors to browse their wares.

Each entrepreneur sets a funding target for their project and waits for investors to pledge money until the goal is reached within a set time limit.

If the target is reached, the project goes ahead, but if there’s a shortfall, no money is invested.

Investments are in one of three formats:

  • Donations – Investors can give some money but won’t see their cash back. Instead, they receive an incentive, like a web site credit, T-shirt, a discount purchase and a general feeling of like a warm hug for helping out.
  • Loans – Sometimes called peer-to-peer lending, investors make a fixed term loan that earns an income from regular interest payments. At the end of the term, the money borrowed is returned. This is similar to investing in a business with a corporate bond.
  • Equity finance – This investment buys shares in a business that will hopefully grow in value if the project is a success. Some investments will earn an income from dividends, but this is unlikely for a start-up that needs to reinvest profits to expand.

Crowdfunding gives investors control over their cash and financial choice, whether they are looking to make a difference by supporting a worthy cause, building a steady income or seeking to increase their wealth in the long-term.

Recently, crowdfunding entrepreneurs have tended to look for equity funding rather than donations or loans.

Equity stakes are often wrapped in a SEIS which offers turbocharged tax incentives to investors.

Equity deals are also good for startups because unlike a loan, shares bring in working capital without any call on cash-flow like loan repayments.

Some hybrid crowdfunding projects offer different levels of incentive depending on the level of investment.

For example, an investor staking £10 may receive a credit or reward, while another offering £10,000 is more likely to want shares in the business rather than a T-shirt.

Crowdfunding is not just a British phenomenon. The concept originated a few years ago in the United States, where popularity is spreading like a brush fire – however US crowdfunding platforms are not allowed to promote equity pitches.

SEIS tax breaks for startups are also limited to UK taxpayers.

What are investment platforms?

Investment platforms work on a similar principle to crowdfunding, except rather than dealing direct with entrepreneurs, investors are more likely to deal with fund managers and large financial institutions.

A typical investment platform will offer a wide range of investment funds, bonds, stocks and shares.

Many will also give access to foreign currency exchanges, spread betting and other high level financial instruments.

Investment platforms come in different guises, such as fund supermarkets or share dealing portals, but work in the same way.

Investors pick their funds and often hold them in ISAs or self-invested personal pensions (SiPPs) to shield growth from capital gains tax and to earn pension contribution relief.

How platforms earn their keep

Crowdfunding, peer-to-peer lending and investment platforms make their money by shaving a small amount from each transaction as a management fee.

Entrepreneurs factor in a percentage of their funding target on crowdfunding platforms as a cost of doing business.

Investment platforms work the same way. Fund managers pay a fee as a thank you for the introduction to an investor and investors pay a few pounds here and there for each financial deal.

Taking the plunge as an investor

Crowdfunding and investment platforms unlock the door to a new world of alternative finance for business projects and social ventures.

Platforms are the pick and mix of the financial world where investors have the freedom to back good causes as well as take a more hard-nosed attitude towards growing wealth.

For example, let’s look at Peter. Peter has disposable income that he wants to invest in different ways.

A good proportion goes into a standard investment platform that holds bonds, shares and stocks in a SiPP. The dividends and any trading profits are reinvested to grow the fund. Within the SiPP, Peter spreads his risk to keep the bulk of his wealth safe while speculating to boost his profits.

He mostly makes personal investment decisions, but occasionally takes to an IFA who he pays for professional advice.

Peter also has a social conscience and has pledged cash through a crowdfunding platform to help a charity near to his home build a playground. The charity offers no return on his donation but has put a plaque bearing his name on the wall in recognition of his help. His children also benefit from having somewhere to go and play.

Peter is also looking to grow his cash pile by taking equity stakes in startups through crowdfunding.

The businesses are scattered not only around the UK, but across the US and Europe.

One is a local coffee shop which he hopes will make him a profit on his investment – but he does pick up the park of 20% off his bill every time he visits.

Without smart technology, crowdfunding and investment platforms, Peter’s financial options would have been seriously curtailed in the past.

His access to opportunities would probably be limited to direct mailing from financial firms and what he could glean from the media.

Investing and tax

Investors are offered incentives to pump cash into businesses and to save for retirement.

Financial experts will talk about ‘wrappers’, which are tax breaks put forward by the government to encourage investment.

Here’s a list of some tax-effective schemes that investors can opt for. The figures are for the 2015-16 tax year:

  • ISAs – The investment limit is £15,240 for each saver. Investments held in an ISA grow free of capital gains tax
  • Pensions – Taxpayers can contribute up to £40,000 a year towards a lifetime allowance of £1.25 million. Contributions receive tax relief at the taxpayer’s marginal rate, so £80 paid in is topped up to £100 by HM Revenue & Customs (HMRC). Pension funds grow free of capital gains tax.
  • Seed Enterprise Investment Scheme (SEIS) – Investors can take an equity stake in a startup up to a maximum value of £100,000 in a tax year. SEIS offers 50% income tax relief, so a £20,000 investment is worth £10,000 tax relief.

SEIS also offer capital gains tax relief – a 50% exemption on the disposal of assets to raise money for a SEIS investment, while the value of any shares grows tax-free.

If a startup fails, investors also pick up loss relief to offset against other income

Other tax breaks for larger investment sums are available under the Enterprise Investment Scheme (EIS), Venture Capital Trusts (VCT) and Community Investment Tax Relief (CITR).

What are the risks?

All investments come with some level of risk, and investors are exposed to losing some or all of their cash on a crowdfunding platform.

Most crowdfunding investments are outside of the UK financial redress scheme, which means problems cannot be taken to an ombudsman for arbitration and the Financial Services Compensation Scheme will not cover investment losses.

Investment platforms are a mix of regulated and unregulated investments, so investors should take care to assess the risk before parting with any cash, but will find some transactions are covered by UK financial redress schemes.

A key point to watch is crowdfunders and investment platforms are ‘execution only’ investments, so no advice is offered and no alternative investments that may be available outside the platform will be offered.

Taking independent, expert advice is important to help investors make the right financial decisions based on relevant information, regardless of whether the pitch is just for pledging a few pounds in return for an incentive reward or a call for several thousand pounds as an equity stake in a growing business.

Investment platform and advice directory

Here is a selection of some popular online platforms and information sites where you can find out more about investing:

Crowdfunding

Peer-to-peer lenders

Managed funds

Investment platforms

Investment information

Tax incentives