Crowdfunding and peer-to-peer lending

Crowdfunding is one way that individuals, charities, and businesses (including start-ups) can raise money from the public to support a project, campaign, or person, normally via an online platform.

While there are benefits, you should remember that crowdfunding and peer-to-peer lending are considered high-risk investments.

Types of crowdfunding

There are different types of crowdfunding.  

Regulated by the FCA:

• Loan-based crowdfunding (peer-to-peer lending): Consumers (investors) lend money to businesses and individuals in return for interest and capital repayment over time.
• Investment-based crowdfunding: Consumers invest in businesses by purchasing shares or debentures, which act like bonds.

We also regulate payment services provided in connection with:

• Donation-based crowdfunding: Consumers give money to enterprises or organisations they want to support.
• Pre-payment or rewards-based crowdfunding: Consumers give money in return for a reward, service or product (such as concert tickets, an innovative product, or a computer game). 

Benefits of crowdfunding and peer-to-peer lending

Crowdfunding and peer-to-peer lending offer several advantages for both fundraisers and investors, especially when traditional finance options are limited or unavailable.

• Alternative access to finance: Crowdfunding and peer-to-peer lending can help individuals and businesses – particularly start-ups – raise funds when banks or other lenders are unwilling to lend, or only do so at prohibitively high cost. It opens opportunities for innovation and community-driven projects that might otherwise struggle to get off the ground.
• Personal and community engagement: People may find it rewarding to support a business or project as it grows, especially if it aligns with their values or interests. Crowdfunding and peer-to-peer lending also enable people to back local initiatives or individuals, fostering a sense of connection and impact.
• Potential for higher returns: Some crowdfunding and peer-to-peer platforms offer returns that exceed those available from traditional savings or investment products. These may come in the form of interest payments, dividends (payments made to shareholders from profits earned as a reward for your investment), or capital gains. However, these returns are not guaranteed and typically come with higher risks.

Risks of crowdfunding and peer-to-peer lending

Crowdfunding and peer-to-peer lending are considered high-risk investment activities. Different platforms and products carry different levels of risk, and it's crucial to assess each opportunity carefully.

All crowdfunding and peer-to-peer lending platforms must:

• Make sure investors understand the risks, using clear language.
• Check borrowers and investment opportunities to make sure they are credible and genuine.
• Support investors throughout the investment.

Loan-based crowdfunding (peer-to-peer lending)

If you choose to invest via a loan-based crowdfunding platform, you should be aware that:

• There is no Financial Services Compensation Scheme (FSCS)[2] protection if the business fails. This means you could lose all your money.
• Liquidity risk: While some platforms offer a way of cashing in your investment, you may not be able to sell your investment quickly or for as much money as you paid in.
• Credit risk and no guaranteed returns: Borrowers may not succeed in their ventures, meaning they can’t return your money.
• Higher risk than savings accounts: Unlike savings accounts, you may lose some or all of the money that you invest. 

Investment-based crowdfunding

This type of crowdfunding involves investing in businesses – often start-ups – through shares or debt instruments such as debentures. Debentures act like bonds, where you invest money in the firm for a set period and, in return, you’re paid regular interest and the original amount you invested is paid back at the end of the term.  

While it offers the potential for returns, risks include:

• There is no FSCS protection if the business fails.
• Liquidity risk: While some platforms offer a way of cashing in your investment, you may not be able to sell your investment quickly or for as much money as you paid in.
• High risk of capital loss: Many start-ups fail, and investments may result in a total loss of capital.
• No guaranteed returns: You may not receive dividends, interest payments, or capital back if the business fails.  
• Dilution and long-term commitment: If a company issues more shares, your ownership may be diluted. Returns may take years to appear, even in successful ventures.
• Increasing risk over time: Businesses may become more vulnerable as they grow, especially if they take on additional debt or fail to meet financial targets. 

Our approach to crowdfunding and peer-to-peer lending

We support innovation in financial services, including crowdfunding and peer-to-peer lending. However, if you choose to invest, you should be aware of the risks.

To reduce the risk of harm, crowdfunding and peer-to-peer offers can only be promoted to certain investors, including:

• Restricted investors who confirm they will invest no more than 10% of their net assets (investable savings) in high-risk investments.  
• Sophisticated or high-net-worth investors, who are more likely to understand and manage the risks involved.
• Consumers who pass a test showing they understand the risks. 

How to protect yourself

Before investing, make sure you’re happy with:

• The checks the platform has conducted on the business or borrowers.
• The level of risk for potential loss.
• The value for money offered by an investment, considering fees, taxes and default rates (the percentage of loans that the firm fails to repay in a set period of time).

Only invest money you can afford to lose.

Always be wary if you’re contacted out of the blue, pressured to invest quickly or promised returns that sound too good to be true.

Find out more about how to protect yourself against scams[3]. Or, if you think you have been scammed, find out how to report it[4].