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Crowdfunding from a Legal Perspective

If you are considering crowdfunding to launch your fashion product, there are a number of legal issues that should be considered before trying to raise money through such a platform.

Tahir Basheer of Sheridans law firm shares his advice to keep you ahead of the game (note: most of the points are relevant to Equity Crowdfunding).

There are three main types of crowdfunding:

Debt Crowdfunding

Investors loan money directly to an individual and hopefully receive their money back with interest. Also called peer-to-peer (P2P) lending, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in. An example of a Debt Crowdfunding platform is the Lending Club.

Equity Crowdfunding

Investors buy shares in a company and become part owners. They make a return on their investment either by being paid a dividend or by selling their shares at a later date, when the company value has hopefully increased.

It is up to the board of the company to decide whether to declare a dividend and how much, and if and when to sell the business, so equity crowdfunding tends to carry a higher risk for investors (but potentially the highest returns). Examples of such platforms include Crowdcube and Seedrs.

Donation Crowdfunding

People pay money to an individual simply because they believe in the cause or like the items being made. Rewards are often offered to the investor, and such rewards tend to be better the more money has been given. Examples of rewards can be: the actual item the project has been set up to fund, tickets to an event, regular news updates, free gifts and so on.

This is a popular crowdfunding type for emerging designers who are looking for a direct and cost effective way to reach customers. Often, this method can be simply seen as a way of pre-selling innovative items before they are made. Examples of Donation Crowdfunding platforms include Kickstarter and Indiegogo.

Tahir’s Crowdfunding Tips

  1. Think carefully about which platform is most suitable for your project. The crowdfunding platform you choose will not only have an impact on your chances of success but also the fees you pay. You should think about things like what market you are targeting and whether you are willing to give away parts of your business in exchange for funding.
  2. Make sure any proposal complies with financial promotion legislation.
  3. It is important to consider whether disclosing your business or product before it has been released or made would be detrimental to the protection of associated intellectual property rights.
  4. Any promotion must comply with the company’s articles and any shareholders agreement that may be in place.
  5. There are a whole host of issues that arise simply through having a large number of new shareholders in the company. It may be necessary to create new classes of shares for the new shareholders and it may be necessary for the new shareholders to become parties to a new shareholders agreement that is separate to the one signed by the company’s founder shareholders.
  6. It is important to consider the effect that a large number of shareholders may have on any future investment round as investors may be put off by such a large number of people involved.
  7. Higher standards of corporate governance will also be required to accommodate a large number of shareholders who are based in different jurisdictions.
  8. Be prepared. There may be an increase in company secretarial work that will be required to deal with the administrative tasks associated with a large influx of new shareholders.
Related reading: Business funding for Fashion Brands

Fashion start-ups and designers can certainly benefit from the pre-sales models of crowdfunding platforms like Kickstarter, particularly when there is already a customer base that can be marketed to via the crowdfunding platform. Whilst the visibility that crowdfunding offers is great, the crowd might not really understand your business and if they do not fund then you will be a visible crowdfunding campaign which has not succeeded.

For more information on crowdfunding visit the UK Crowdfunding Association (UKCFA), a self-regulatory trade body set up by several UK crowd funding platforms.