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Heresy – The Reformation of finance

Many people refer to crowdfunding as the democratisation of finance, I am one of them. But speaking in the Netherlands recently I realised that in fact we are experiencing a much more profound change. It is in fact the Reformation of Finance and I am a heretic.

Very recently I had the pleasure of visiting Utrecht in the Netherlands to speak at the launch of a new crowdfunding platform into the Dutch market. Tailwind Crowd is a lending and reward platform founded by a suitably international group of Spanish, Mexican and Dutch entrepreneurs.

Being an economic historian by training I couldn’t help but acknowledge the historical links between Spain and the Netherlands, and the history of Dutch financial innovation through the origins of the VOC and the Amsterdam Bourse. In a nod towards that period I introduced my words at the Cervantes Institute by displaying an image of “The Fight Between Carnival and Lent” by Peter Bruegel the Elder.
The Fight between Canival and Lent
Bruegel, a Dutch painter, chose the crowd in all its diversity and complexity as the subject of the picture. This was a distinctive approach in the 1560’s when he painted it, given most art till that time had been commissioned and focused on wealthy or privileged individuals or drew on classical themes in the Renaissance style. But here the focus is spread cross the average late medieval man and woman in the street in all their rich colour. A suitable metaphor for a crowdfunding presentation I thought. But slowly it seemed to me that we can extend the metaphor further.

Bruegel was also a print maker, consorting with map makers dangerously marking out and sharing the known world. Print makers, the revolutionary technologists of the time were also ,unusually, not organised in the early days into Guilds and so were not an exclusive or restrictive “caste”. Their activity and skills were at the heart of spreading and popularising what had till then been the exclusive domain of the rich and privileged namely books and art.

Access to this type of technology put the Low Counties at the centre of the Reformation. Tired with the corruption and monopoly of the established Roman church, alternatives were being proposed. People were seeking to take institutions out of their route to salvation and commune with their God more directly. Courageous speakers articulated these views at great personal risk and others took incendiary steps to make these ideas a reality. Tyndale Bible, for example, was translating the bible into English making it more widely available and setting the path for taking religion out of the hands of being mediated through and interpreted solely by an anointed elite of the priesthood.

This then was the disintermediation of religion. This was the broadening of the faith. It became possible to imagine owning your own conscience and faith.

An historic and monumental schism with an accepted and enforced orthodoxy that has cost much blood, pain and death down the centuries. But that orthodoxy was challenged, and broken, even though it had seemed so stifling and entrenched and unshakeable in its power and permanence to the contemporaries of Bruegel.

And so it seems to me the simple metaphor I began with rang ever more true to the profound changes we are experiencing in the crowd economy. It seems appropriate that the self proclaimed “masters of the universe” and the self styled “sophisticated investors” are no longer the sole orthodoxy, no longer the only faith to financial salvation. They have been shown to be untrustworthy, corrupt, self serving and fallible.

And so I declare that I do not think that what is happening in alternative finance is any less significant, profound or any less enduring than that which happened in religion back in the 16th century. In the same way that those changes ripple down through the years touching and launching so many developments and changes in progressive emancipation we take for granted today, so too I think we are at the beginning of changing radically the way we imagine the business of commerce and finance. We are at the birth of many new approaches which, whilst recognising that finance has a role to play in our lives, are no longer reliant on an established model or one cadre of anointed intermediaries in order to access and use it.

But just like the Reformation there are those that will say this is heresy. They will say there is only one true faith that to desert it leads only to damnation. They are wrong.

As an unapologetic up heretic and dissenter I am hoping nevertheless that the practice of burning at the stake has passed into history!

Regulating Crowdfunding – Key Considerations

These slides and the associated text were used as part of my Keynote address to the first ever National Crowdfunding Conference in Hyderabad India in March 2015. My subject was – The Regulation of Crowdfunding, Key Considerations – and concluded that thus far no regulator has got it right!


Abbreviated commentary to accompany the slides

Great to be speaking at such a momentous event. The world’s largest democracy embracing the democratisation of capital is quite a thought.

Very difficult to cover such a broad, diverse and complex subject as the regulation of crowdfunding in such a relatively short period. So I intend to make a proposition that experience to date is that the regulators are not making a good job of regulating crowdfunding in any location and that this is a risk and a challenge as the old world old capital old regulation thinking hat is driving the regulators action is eroding the value of crowdfunding.

My proposition is then that crowdfunding is different finance, and it brings specific and unique values which make it better than other traditional finance.

If we regulate as if it were traditional finance re reduce those benefits, introduce risk and erode the opportunity presented by alternative finance.

If we are to nurture grow and secure crowdfunding and make maximum use of its unique and valuable features we need to think anew about how we regulate it.

Now I have been known to be critical of regulators – in particular in the UK, and some see me as being anti regulation. This is not the case. Regulation has an important role to play. But I am against BAD regulation or poorly framed regulation, ill informed regulation, or regulation which actually undermines what it sets out to achieve.

To begin with I suggest that crowdfunding is different and better finance.

Its nature, philosophical underpinnings, and dynamic bring so many additional benefits over and above simply funds. Let us highlight just a few of those benefits

For example this is new disintermediated money flowing directly into the marketplace. It is by its very nature more diverse because of the broad range of participants. This brings many different ideas, insights and attitudes. It often shows novel expectation of return because of this – that is to say the investors are not driven by the common single aggressive financial expectations of many traditional investors, the motivations are broader.

It is also closer to the market by virtue of the fact that the investors are often the consumers of the products and services they are backing and, as with crowdsourcing innovation, this has many benefits for fit, relevance insight etc.

It is lower cost over time because of the expectations, the terms, and the rapidity of solution. So yes it is often quick money, becoming available much quicker than any otehr methods of sourcing investment.

But at the same time it is often slow or patient money which may be an illiquid investment or not a fickle investment ready to jump ship at the first opportunity.

Finally it can be locally focused bringing and fixing the money into the local economy in a way which yields additional benefit when compared to the flight of capital to other locals. This is not unlike the effects and positive impacts of initiatives like local currencies.

Let us turn to the purpose of regulation. At a high level we can suggest that the purpose is to primarily reduce risk, build confidence and so grow the market. We can apply these across almost all circumstances so are not specific to any particular local. Regulation is often aimed at reducing the risk for all participants associated with the activity. Whilst not the specific action of the regulators they would hope that this should progressively build confidence and so grow the market place.

If we accept then that risk mitigation is a key function of regulation it is very important that we understand that crowdfunding has specific characteristics and philosophical principles of risk mitigation inherent to it.

Amongst these are the notion of atomisation – breaking funds into many small contributions – the “long tail” of finance if you will. As such each investment is sufficiently small to not present a risk to the portfolio.

Transparency. Access to information is much more open and transparent in a crowdfunding scenario. There is a much greater parity and ubiquity of access to data than in the typically asymmetric access investment model of old capital.

Scrutiny – the crowd provides a wide and very diverse scrutiny exercise bring a greater variety of exploratory and investigatory techniques than the older capital markets which tend to run on a limited range of established models and lenses.

In terms of nurturing growth the transaction costs must remain low for an atomised model to work and scrutiny is entirely dependant on very high levels of participation so no barriers to participants.

Any regulatory framework must both understand and respect these models. If they impede them in any way by perhaps driving up costs, erecting barriers, discouraging atomistation and encouraging the perception of Crowdfunding as being like any other investment model so distorting the breadth of expectation of return then the result is two fold

Firstly it will erode the unique inherent additional values that crowdfunding brings and, importantly, it increases risk.

Of the four models we think of the Loan/debt and Equity Model being the most heavily regulated but we should not forget that other models are subject to a raft of other regulatory requirement for example around TAX, IP protection, money transfer regulations, etc etc

If we accept that we can reasonably reduce the main purposes of regulation to some high level principles so too we can look at high level description of the approaches to regulating.

These are typically by:

  • Determining who is permitted to participate in the process through some form of gating.
  • Defining what is to be shared in what format, when and to whom
  • Setting a set of rules of behaviour and conduct to structure the process.

This is traditional financial regulation and immediately we can see that these default approaches present points of tension with h inherent risk mitigation processes in crowdfunding.

If we look at how regulation has developed and impacted on crowdfunding in the past few years we can actually see two distinctive approaches which spring from two distinctive legal and regulatory traditions which I shall describe as the “Common Law” and “Napoleonic Code” approaches.

These are you understand very broad brush strokes which allow us to deal with a complex environment but I think the model is a good sense making tool

In the Common Law tradition an approach is tolerated and accepted whereby participants satisfy existing applicable regulations and law which seem relevant to the activity in question. We might think of the UK as initially being a good example of this.

In the Napoleonic code there is a perception that a specific enabling law must exist to permit the activity to explicitly take place. This might be demonstrated in Italy for example.

In the Common Law tradition an approach is tolerated and accepted whereby participants satisfy existing applicable regulations and law which seem relevant to the activity in question. We might think of the UK as initially being a good example of this. They find ways to satisfy a series of regulatory barriers or requirements sufficiently to operate.

The mechanisms of this “satisfying” approach is novel and inherently innovative. Typical approaches have included techniques to outsource certain regulated functions or to progress through a regulatory approval framework were required. Similarly mechanisms where the structure of some type of investment vehicle is created in such a way to allow wider participation, so we might think of some of the holding models used by Symbid or similar. We can also find examples of where certain approaches use specific exemptions or operate below certain thresholds so we can think of the use of subordinated profit participating debt rules in Germany to avoid the prospectus requirements etc. we should not forget the sort of self denying gated approaches where only certain participants are permitted to access platforms – although I would question the validity of describing these operations as “crowdfunding” in any real sense. What is important though is that this environment encourages innovation and this, in my view, is much better than the permission mode.

In this Napoleonic or “permission” tradition, when a road block is encountered it cannot be circumvented or satisfied it requires the introduction of specific legislation to permit and so enable operations to take place. This is inherently less innovative and the issue in many ways is that this immediately defines the art of the possible. We can see this in Italy for example which trumpeted – rightly – the fact that it was first to specifically pass enabling legislation, but it has set very top down and defined parameters about what can and cannot be done.

The UK regulators like to trumpet the vibrant nature of crowdfunding in the UK as a tribute to its fabulous regulatory environment and draw favourable comparisons between, say, the UK and the USA. Apologists for them might also say this is an indication of good regulation. I would disagree. The UK’s pre-eminent crowdfunding culture is there despite the regulator and not because of it, and is a testament to the common law tradition not the regulator. The sector has always been regulated it is just that the mechanism of satisfying the regulations was innovative. Those specific regulations which have been subsequently added to deal specifically with crowdfunding have, in my view, been badly informed, unnecessary, and wholly detrimental to the long term future of crowdfunding as novel and better funding. In fact they introduce systemic risk into the sector by not understanding how crowdfunding mitigates risk as distinct from other money markets. They have, for example, reduced participation and reduced transparency, and they have done nothing to support the atomisation of investments.

I do not wish to single the UK regulators out though. It is hard to find examples of good, well informed, forward thinking, regulation. Italy will need to revisit its laws as they are clearly too restrictive. The USA still awaits Title III and individual states are simply going feral to accommodate need. Australia – long active in small raises – is increasingly recognising that it must embrace the retail investor in order to grow, and Germanys retrospective take on regulation is effectively strangling what had once been quite a vibrant market.

So no one gets a gold star!

The greatest danger with bad regulation is that it both increases risk but, probably even worse, is that by treating crowdfunding like old finance we erode the unique and specific value that crowdfunding brings. We have agreed that crowdfunding is much more than money and as such is a new paradigm in business development with better benefits and a more inclusive and equitable model.

The more we treat it like old finance through our regulatory approach the more institutional money flows on, the more old fashioned expectations predominate and the more we introduce risk.

This slide shows the volume of institutional money flowing onto one of the major P2P lending platforms in the UK. It is worth nothing growth of institutional money began when FCA took P2P under its regulatory wing. It is reasonable to ask if the sector is abandoning its roots in a dash fro growth and in so doing reducing the value of its offer and introducing risk?

If we look at the numbers for Crowdcube for example – and I am in no way criticizing the platform, it is a good a successful one and they do share their numbers – but the numbers seem to suggest a gradual climb of average investment size. This is a number to watch as I believe that if it continues to grow, and I fear it will on all platforms, then the principle of atomisation is declining and so risk is increasing for investors.

I want to leave you with an analogy and an inspiring quote from someone who I think knows a great deal about alternative finance. Muhammad Yunus speak about a similar challenge when establishing microfinance. He points out that it is not the same as old finance and so you cannot structure a new institution in the image of a different one. I would argue the same principle applies to crowdfunding. To make crowdfunding just an extension of old existing, and some might argue discredited finance, is inappropriate. It both loads it with risk and decreases its value.

I say the jury is till out on regulation but my call is for different, better informed and better regulation for better finance. The disintermediated world of crowd finance perhaps requires a disintermediated regulatory model.

Thank you


Crowdfunding Thermo Tent on Kickstarter

Crowdfunding Thermo Tent on Kickstarter

Its not not often that you get to hear from someone whilst they are actually running a crowdfunding campaign – usually it is afterwards as they bask in the glow of success or mull a bruising failure.

But here we speak to Derek O’Sullivan in the midst of his Kickstarter campaign raising funds for Thermo Tent.

In the podcast Derek tells us why he chose crowdfunding and what he hopes to get from the campaign. He also explains the unique and innovative aspect of Thermo Tent



You can access the campaign here

The incidental music used in the podcast is
“Beach Bum” Kevin MacLeod (
Licensed under Creative Commons: By Attribution 3.0

Low Transaction Costs & Declining Barriers to Participation

In the first of our series on the principles of crowdfunding we explored the ideas of the Long Tail and the atomization of sums raised. We continue on with part two of the series this time looking at the role and imperative of Low Transactions costs and the declining barriers to participation that are so central to how crowdfunding works.

Low Transaction costs

For the Long Tail to be an effective operational model the incremental cost of each transaction must be low enough to ensure that the sums raised are not consumed by aggregating costs as well. The online e-commerce world has achieved this by reducing retail space costs by removing the need for a bricks and mortar presence. Selling on line and distributing from huge logistics bases has driven down the costs of each transaction markedly. In the crowdfunding environment the same effect is delivered by platforms which take the pain out of establishing the necessary logistical and processing architecture to run a campaign and, in so doing, making it possible and economically sustainable to keep the costs of collecting each donation or investment very low.


It is for this reason that over burdensome regulation and legislation is such a potential problem for crowdfunding. The higher the regulatory burden for a platform the higher the costs they will, inevitably, have to pass on to their users. This in turn will mean that crowdfunders will increase their targets in order to cover the cost of the campaign and, by extension, drive down success rates. Oddly, from a regulator’s point of view, it may well prove counter productive by driving more projects to run unregulated DIY campaigns to maximise returns and so ultimately undoing and undermining what they might be setting out to do.

Declining Barriers to Participation

One of the principal benefits of the online world and Web 2.0 in particular is the idea of declining barriers to participation. It is ever easier for people to become active, engaged participants online. This might be buying or selling, starting business, expressing views or any number of activities that were once more problematic and challenging to undertake. Crowdfunding is a beneficiary of this and you might imagine that for the Long Tail to work well that ability of large numbers of people to get involved is key. It must be easy for people to find, engage with and share a crowdfunding campaign. A key reason for expanding participation in a crowdfunding context is to ensure that the flow of new previously unavailable funds are unlocked for use in this market place.
So not only is the general principle of low and the declining barriers important to provide the resources to support the crowdfunding sector in general, you need to employ the same principle at a project level by offering rewards or investment opportunities that are low enough to make it a simple and low risk decision to engage. The more people that can get involved the more you can raise and the greater diversity of insights skills and expertise that are on offer.

How to run a crowdfunded Community Share issue

If you want to know how to run a crowdfunded Community Share issue what better way than to hear from someone who has done it?

In this episode we speak to Jamie Veitch who was an important participant in the Sheffield Live crowdfunding campaign. This project raised £165,000 through a Community Share issue which is a specific and increasingly popular type of crowdfunding.

Jamie tells us why they chose this approach and some of the challenges and benefits with running this type of campaign.

The campaign was to raise funds for the existing community radio station to move into the TV realm.

You can find out more about Sheffield Live here and you can find out more about Jamie Veitch here.

The incidental music used in the podcast is
“Beach Bum” Kevin MacLeod (
Licensed under Creative Commons: By Attribution 3.0

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