Scottish expert advisory panel on the collaborative economy: report

5.0 Finance in the Collaborative Economy

With traditional financial institutions becoming more risk averse, new ways to access capital have been emerging. Collaborative finance is a development of financial transactions between individuals and businesses. The sector is growing and has yet to reach its potential. Collaborative finance plays an important role in helping individuals and businesses access capital contributing to inclusive growth.

PwC ^[22] describe collaborative finance as individuals and businesses who invest, lend and borrow directly between each other, such as crowdfunding and peer to peer lending. In 2015 they estimated that it generated €250 million in revenue and was valued at €5,200 million. Collaborative finance is also known as crowdfunding, two descriptions are detailed below.

• Crowdfunding is a way of financing projects, businesses and loans through small contributions from a large number of sources, rather than large amounts from a few. Contributions are made directly or through a light–touch platform rather than through banks, charities or stock exchanges. Nesta
• Crowdfunding is a way in which people and businesses (including start-ups) can try to raise money from the public to support a business, project, campaign or individual. Financial Conduct Authority ( FCA)

Crowdfunding usually takes place on a digital platform that allows businesses or individuals to raise money, and investors to provide that money. The business or individual seeking finance often explains their project in a pitch to attract loans or investment from as many people as possible. The FCA does not regulate all models of crowdfunding. ^[23] The models that are regulated are:

• Loan-based: also known as 'peer to peer lending', this is where consumers lend money in return for interest payments and a repayment of capital over time.
• Investment-based: consumers invest directly or indirectly in new or established businesses by buying investments such as shares or debentures.

Those they don't regulate are:

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

Crowdfunding raised just over £27 million in Scotland between October 2014 and September 2015. Crowdlending (peer to peer) to businesses was the largest sector valued at £20,529,000 with reward campaigns raising £2,586,594 and equity campaigns raising £3,948,777. The proportion of the value of UK crowdfunding raised in Scotland has risen from below 1% in 2013 to 4%. ^[24]

The growth and development of the collaborative/alternative finance market has been accompanied by a progressive and sensible route to engaging with regulation and regulators, with the FCA working with industry platforms and the UK Crowdfunding Association. In terms of recommendations to the regulatory environment, this panel do not have anything to add to the work undertaken by the FCA.

With regard to crowdfunding into other areas; such as community or arts projects, there are some clear benefits to supporting activities in this area while recognising that the ongoing sustainability of projects will be an important consideration. This panel has seen examples of crowdfunding for community projects that would otherwise not have been funded and, in particular, examples of institutional and public funding being matched to the crowd's contributions which show the multiple benefits of raising small amounts of money from larger numbers of people.

Recommendation

• Experimentation to test how 'matched' crowdfunding can be used as a successful mechanism to support citizen-led innovation and community projects.