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* Growing market raised 1.2 bln euros in 2011
* Lack of tailored regulation viewed as obstacle
* Regulators have highlighted risks
By Kylie MacLellan
LONDON, Dec 7 (Reuters) - A new breed of internet-based financiers are calling for action to end regulatory uncertainty they say is preventing them from getting money to the small and medium-sized businesses that need it.
The so-called crowdfunding sector raises cash from members of the public to fund lending and investment. Regulators, however, have proved resistant to pleas for adjustments to rules that are tailored to more traditional markets.
"Operators of these platforms find it difficult to launch and flourish because existing EU and UK regulation does not fit the new models," operators within the sector said in an open letter to EU and UK policymakers on Friday.
The plea coincides with a summit to discuss proposals for regulating a market that has developed in reaction to reduced bank lending to small and medium-sized enterprises because of tougher capital rules and greater regulatory scrutiny.
A host of alternative financing models have cropped up online, many allowing individuals to lend to, or invest in, companies with sums from as little as 10 pounds ($16). Massolution, a research and advisory firm specialising in the sector, says that 1.2 billion euros ($1.6 billion) was raised globally from crowdfunding last year.
Though some crowdfunding websites have tried to fit their operations within the existing regulatory framework, most remain largely outside it.
Part of the problem in drawing up appropriate regulation is the wide range of activities involved. Some offer debt, some equity, while others seek donations for charity or funding for creative projects in return for some non-financial reward.
With little or no expected returns from the latter, the main regulatory focus would be on equity crowdfunding and peer-to-peer lending.
As well as making sure that individuals are aware of the inherent risk involved with putting money in start-ups, the industry wants to avoid the risk of scams by ensuring that platforms vet businesses adequately.
Britain's Financial Services Authority (FSA) warned in August that inexperienced investors should be aware of the risks in crowdfunding websites. A few days later United States securities regulators put crowdfunding at the top of their annual investment scams list.
Views differ about how to tackle these risks without stifling an increasingly important source of funding, and the matter is complicated by the varying rules already in place in different countries across Europe.
Measures taken by Seedrs, the only crowdfunding website to have received FSA approval, include requiring investors to pass a test to show that they understand the risks.
"It is hard to come up with a whole securities regulation; sometimes it does have to be a bit incremental and adaptive," Seedrs founder Jeff Lynn said. "There is no question at all this is going to be a space that will continue to move."
Some would like the operation of such platforms to be a distinct regulated activity, but others argue for smaller steps, such as a cap on the sums that people can invest or lend.
The British government, keen to improve the flow of finance to small businesses to boost the sluggish economy, has set up a working group to look at all aspects of policy on such sites.
The FSA said that it considers authorisation of crowdfunding schemes case by case. The European Commission, meanwhile, is considered as so far having had a largely observational role.
Though the introduction of a separate regulated activity could still be some way off, the co-founder of peer-to-peer site Zopa, Simon Deane-Johns, believes that increased engagement with governments and regulators shows that things are moving in the right direction.
"Over the next year or two it should become progressively easier to set up a platform," he said, "possibly through a combination of the FSA understanding more readily where things fit within the current regime and balancing that with some self-regulation."