Crowdfunding has had a wake-up call from the real world as Facebook buys in to virtual reality company Oculus VR for £1.2 billion.
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The deal is great for the Oculus VR founders, who raised their start-up cash from crowdfunding platforms.
But no one who pledged funds to support the firm in the early stages will see a penny of that £1.2 billion bonus.
The deal calls into question the buddy system for crowdfunding, which is like a TV charity appeal asking for donations in return for some free merchandise or a mention on air.
The big question sensible crowdfunders are bound to ask is from now on is what is in the deal for them?
Crowdfunders should look at SEIS
Thousands of small investors gave a few pounds here and there to Oculus VR and other crowdfund beggars who could not raise start-up cash for their projects from banks or venture capitalists.
More experienced investors will put their money into a Seed Enterprise Investment Scheme (SEIS) that offers tax breaks on going in and exiting the deal in return for an equity stake.
At least investors in UK firms like Oculus that take a shareholding have a say in how the company is run and can sell their shares at a profit – or if the firm fails, set off the loss against other taxable income.
Certainly crowdfunding has a place, but the reason why regulators in the US, UK and Europe are stepping in to tighten up the rules is because entrepreneurs are taking advantage of inexperienced and vulnerable investors who do not realise that someone else is making a killing off their cash and cutting them out of the deal.
Poor returns
Crowdfunding has reached a tipping point. The online platforms are raising millions of pounds worldwide and many are offering little in return.
If they do offer an equity stake, this is often diluted with a further round of capital raising.
Crowdfunders are charitable people and have the best of intentions, but they have no control over how their money is spent and gain little out of the transaction when entrepreneurs can manipulate their companies to make big bucks and offer nothing in return.
For investors with a few thousand in the bank who want to speculate on new start companies, SEIS offers more solid tax breaks, more control and an exit route that gives a share in any profits.
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