Author: Amy Collins
This article is taken from the latest edition of Fladgate’s Fashion Update. Please email the marketing team on email@example.com to be added to the mailing list for future updates.
Crowdfunding has become an increasingly important method for raising much needed start-up funding for businesses, and the fashion industry is at the forefront of this trend with many crowdfunding platforms having a fashion sector focus.
Retail Week recently published a white paper, in association with Crowdcube, analysing the plethora of options open to retailers looking to fund their future growth agenda, and crowdfunding was noted as being a viable option for ambitious retailers alongside the more traditional methods of raising finance, such as IPOs and bank debt. “Crowdfunding, where startups, early stage and growth businesses sell equity stakes in their businesses direct to individuals via online platforms, has become a viable finance option for retailers. Looking at the figures raised by a raft of consumer-facing businesses, it is clear that this type of fundraising is no longer a fad…The benefits of crowdfunding are certainly clear, providing retailers with ready capital while also making a noise about the venture and encouraging loyal supporters to spread the word and share in the brand’s success.” (Retail Week White Paper, October 2014).
As Drapers recently reported, The New Craftsmen, the venture co-founded by Mark Henderson, chairman of tailor Gieves & Hawkes, to champion British-made crafts, has turned to crowdfunding website Crowdcube.com to raise £150,000 to fit out its first permanent retail premises at One Row in Mayfair, London. In return, investors will receive a stake in the business. Others in the sector who have turned to crowdfunding are Best of Britannia; a local women’s group selling rare customised craft handbags; and a high-end accessories start-up by Heidi & Adele.
Crowdfunding works on the premise that businesses seeking funding promote specific projects or businesses on an internet platform and members of the public provide funding through the platform. More traditional methods of fundraising generally seek a minimum level of investment, but many crowdfunding platforms allow investors to contribute as little as £10 and there is no cap on the level of individual contribution. Typically the entrepreneur will specify a fundraising target amount and cut-off date, and will not receive funding unless this target is reached.
Many businesses have used crowdfunding to great effect to secure lending and investment, but it is important to bear in mind the regulatory framework which exists to protect investors. Financial services regulations seek to protect individual investors who may have little understanding of the nature and precise terms of the investment. Crowdfunding by its very nature deals with speculative and risky investments which are marketed online to a very broad audience of potential investors. As a result, crowdfunding websites (such as Crowdfunder.co.uk, Kickstarter and Indiegogo) are regulated by the Financial Conduct Authority and by legislation intended to protect consumer investors. The regulatory framework for crowdfunding is complex and will depend on whether investors are lending to or investing (in return for a profit or revenue share) in the business to be funded. To a certain extent the law has had to catch up with technological and social developments, and only as recently as 1 April 2014 a new regulated activity of “operating an electronic platform in relation to lending” was introduced. However, the current government is seeking to adopt a light touch approach to regulation as it is keen to encourage lending to and investment in small, start-up business and entrepreneurial activity.
Whether funding is needed to launch a new brand, fund the acquisition of new premises or market, produce and sell a new product line, fashion businesses now have a viable alternative to more traditional methods of fundraising, which has the added benefit of providing a wide-reaching online marketing platform for the brand.
Amy Collins, Partner, Fladgate LLP (firstname.lastname@example.org)