The Isle of Man Financial Supervision Commission (FSC) has issued a consultation in relation to proposals to create a specific regulatory regime to facilitate crowdfunding activity.
Crowdfunding has gained considerable attention around the globe of late. Whilst the volume of funds raised remains modest, when compared to traditional financing mechanisms, the sector is growing exponentially.
Although international norms as to the regulation of this sector are unlikely to emerge for some time, the Isle of Man's proposal for a dedicated regime must surely be the preferred route. Potential platform operators looking to establish in an IFC such as the Isle of Man will always need to clarify the cross-border implications, as regards key target markets; if they do so, the Isle of Man could provide an attractive business base.
The FSC's proposal requires some refinement, and further detail as regards on-going requirements, but if the implementation of the new framework embeds sufficient flexibility then it could help expand access to cost-effective alternative finance for SMEs.
Whilst job creation is proceeding apace in the UK, productivity is estimated to be 12% behind pre-crisis levels. This is attributed largely to lack of capital investment in the aftermath of the global financial crisis. Even if this historic shortfall were to be made up briskly, it would take time for the benefits to be realised.
With real question marks hanging over whether the level of funding historically available from traditional providers of business capital for SMEs - such as banks - will be attained again, it is important to have diversity as to sources of business finance. Crowdfunding will never be a complete solution, but it has the potential to be a key component in a portfolio approach.
It is, of course, the huge progress made in technology that allows web-based services to match crowds of potential funders with SMEs in a cost-effective fashion. To ensure that crowdfunding is allowed to flourish as an economically viable form of alternative finance it is vital that the cost of regulation does not negate the technology-driven efficiency gains. Since any crowd is – of its nature – undifferentiated and capable of comprising individuals from a diverse range of backgrounds, means, expertise and circumstances, there is certainly a creative tension for regulators between protecting vulnerable potential investors and resisting the impulse to stifle innovation. Jurisdictions that strike the right balance will be contributing to the creation of a vibrant business environment and genuine stake-holder economy.
Some business models remain outside the scope of regulation in certain jurisdictions and some operate – with varying degrees of comfort - within legacy regimes; in some places, both scenarios co-exist. Certain other territories simply don't permit crowdfunding, whilst a number of forward-thinking territories have created bespoke regimes to encourage the sector.
The FSC proposes a bespoke regime for the Isle of Man and this is the right approach; there is no justification for differentiating between loan and investment-type models, and traditional investment business regulation notions, such as best execution and best advice, simply do not fit the crowdfunding concept.
The Isle of Man is well-placed to leverage its established expertise in the fin-tech space. Given that any IFC business needs to operate cross-border, the Isle of Man simply needs to ensure that its final regime for crowdfunding is proportionate, future-proofed and doesn't set the regulatory bar at a higher level than applies onshore.
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