Games and interactive entertainment trade body, UKIE, has today published a new Crowd Funding Report as part of its pre-budget submission to government. UKIE’s Crowd Funding Report outlines how the UK’s current regulatory environment can be improved to allow investors, content producers and crowd funding platforms to take maximum advantage of crowd funding investment models.
The report makes several recommendations including for government to recognise the principle of crowd funding as an important source of finance for UK businesses and calling for a light-touch regulatory regime to be applied to crowd funding systems that operate on a financial reward investment model.
UKIE believes that the report’s recommendations can be implemented with minimal changes to legislation and that investment model crowd funding can then operate as a viable route to finance for UK businesses with no extra cost to Her Majesty’s Treasury.
Access to finance is a key barrier to growing the interactive entertainment industry in the UK. UKIE believes that crowd funding models can provide a valuable source of finance for games and interactive entertainment businesses, particularly the large number of innovative and creative start-ups and SMEs that are emerging in the UK.
The basic idea behind crowd funding (which is also sometimes called crowd financing and crowd sourced capital) is that many individuals contribute (generally fairly small amounts) to fund a company or a project in return for the possibility of some reward. This is not a new idea but the internet has now considerably increased the size of the potential investment crowd and made managing individual investors’ pledges more manageable.
The interactive entertainment industry is at the forefront of the adoption of crowd funding and crowd sourcing in the digital sector; a recent American crowd funding project (Double Fine Adventure) recently broke records by raising over $1.8 million on the US crowd funding platform Kickstarter. However, UKIE also believes that crowd funding has the potential for much wider use by SMEs in other sectors and wider community based projects throughout the UK.
The term crowd funding is used widely to refer to three quite different methods of raising funds:
- The Donations Model: Funders provide money to a company or for a project either for no return or in return for some form of non-financial reward. For example a credit or bespoke recognition in the product or a meeting with the creators.
- The Lending Model: Funders provide money by way of a loan with a requirement that the loan is repaid with interest.
- The Investment Model: Funders provide money in return for a share of profits. The Investment Model can itself take one of two forms:
– The Securities Model: A funder invests money in a company and receives shares in that company.
– The Collective Investment Scheme Model: A funder invests money in a project in return for a right to a share in the profits or in the revenues generated by that project, but does not receive shares in the company undertaking that project.
There are already businesses offering crowd funding platforms based on the models above and many examples of creative businesses using them.
However, the growth and application of crowd funding in the UK is restricted by the current legal and regulatory framework – particularly in limiting the potential of the investment models. These barriers principally exist to protect consumers from unsuitably high risk or fraudulent investments, but also prevent platforms from offering simple ways for fans to invest in the creation of projects and be rewarded for doing so.
The key recommendations from UKIE’s report are as follows:
- Crowd funding to be permitted generally: Although this report primarily looks at crowd funding for the interactive entertainment industry, the recommended changes can have many benefits for SMEs from other sectors and wider community based projects throughout the UK.
- A “light touch” regulatory regime: Allowing for fast moving investment in businesses and projects whilst maintaining an appropriate level of protection for potential investors.
- No requirement to issue shares to investors: It should be possible to effect crowd funding projects as collective investment schemes and therefore without the need to issue shares to individual investors.
- No limit on what can be raised per project: There should be no limit on the amount that can be generated by crowd funded collective investment schemes, provided that a fund that is seeking to raise over €5 million would have to produce a prospectus (this derives from the Prospectus Directive).
- An investment limit per person per project: It is important to have a limit to reduce the possibility of any individual investing too great an amount in a project that is unsuccessful.
UKIE’s Crowd Funding Report is available here
UKIE Chief Executive, Dr Jo Twist said: “Having Double Fine’s Kickstarter project raise over $1.8 million has shown the huge potential of crowd funding to benefit games and interactive entertainment businesses.”
“We need the UK to be able to take full advantage of crowd funding to allow video games businesses, community projects and SMEs from all sectors to raise much needed investment. We have produced UKIE’s Crowd Funding Report as part of our pre-budget submission to government, to outline exactly what needs to be done for this to be possible. We’ll be working with government over the next few weeks to push for inclusion of our recommendations in the up-coming Budget.”
UKIE Deputy Chair and Chair of UKIE’s Games Developer Group, Ian Livingstone said: “Getting access to finance is a major hurdle when trying to develop a video game and grow your business. The proposals in UKIE’s Crowd Funding report open up great possibilities for UK games developers to use crowd funding as a significant source of investment.”
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