Renewable Energy Installer September 2014 | Page 11

News: Analysis
Following the crowd
Jonathan Richards, commercial solicitor in the Energy, Projects and Commerce
team at corporate commercial law firm SGH Martineau, introduces the
increasingly popular concept of crowd funding for community energy projects
T
he Department of
Energy & Climate
Change (DECC)
has announced
that crowd funding is amongst
measures being considered to
help resolve the funding issues
that many community energy
projects encounter.
Well-structured
opportunities, marketed on the
right online platform, to the
right potential investors, ensure
crowd funding is an efficient and
reliable way of initiating projects,
but if things go wrong it can be
expensive. But what exactly is it
and what does it do?
Crowd funding uses online
platforms to raise investment
for a wide range of projects,
with typically four categories of
funding:
•
•
•
•
Equity funding – investors
receive shares/an equity
stake in the project.
Loan based funding (peer
to peer) – investors loan
monies direct to the project.
Reward funding – investors
receive a specific reward
related to a project.
Donation funding –
investors receive nothing in
return (usually associated
with charities).
What is a platform?
Websites attract retail investors,
as well as professional and
institutional investors, by
advertising opportunities and
forwarding any funds received
directly to the project seeking
funding.
Projects are typically
charged platform fees of between
0.5 percent and 2.5 percent of
funds raised, together with an
ongoing monitoring fee and some
also charge the investors.
What are the benefits?
Crowd funding is a good
alternative source of finance,
helping initiate projects and
depending on the structure of the
investment, it may avoid having
to give security over its assets,
or avoid a heavy dilution in the
equity share capital associated
with equity/venture capital
investors.
Crowd funding is an
opportunity for investors to
diversify their portfolio, with
platform fees generally lower
than fees associated with
managed funds and allows
individuals to invest in projects
that might normally be restricted
to professional investors.
There is also the potential
to wrap the investment tax
efficiently, through the Enterprise
Investment Scheme/Seed
Enterprise Investment Scheme or
SIPP and still claim government
incentives.
What are the risks?
The Financial Conduct Authority
(FCA) regulates crowd funding
and suggests investors should
understand what level of due
diligence has been undertaken,
the level of risk and value for
money offered by the project
(after charges, taxes and
potential defaults).
Crowd funding projects tend
One for all: Crowd funding presents an excellent vehicle for individuals to
invest in projects usually limited to professional investors, says Jonathan
Richards, SGH Martinau
to be relatively small and might
have neither the infrastructure
nor personnel to achieve
the proposed returns, but if
guaranteed government backed
incentives, such as FITs, ROCs or
RHI, are available, this risk can be
reduced.
Although investors will
usually have their investment
returned if the minimum
fundraising is not reached, they
risk losing valuable interest if
the opportunity drags on for
many months. Investors should
also note that depending on
the platform and the structure
of the crowd funding, they may
have no right of complaint to
the Financial Ombudsman
Service and may not be able to
apply to the Financial Services
Compensation Scheme (FSCS).
The risks of raising capital
through crowd funding are
relatively low for community
energy projects, unless it fails to
raise the minimum investment,
when the costs of using the
platform and preparing the
offering documentation is
wasted.
Legal and regulatory
considerations
Although crowd funding is
relatively new and the legal and
regulatory wrinkles still need
to be ironed out, the advice for
those looking to invest or for
community energy projects
seeking investment through a
platform, is seek the appropriate
legal, financial and regulatory
advice - ideally, find service
providers that have experience
in dealing with these unique
matters.
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