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Crowdfunding and investor claims

In March of this year, the Financial Ombudsman ordered an investment-based Crowdfunding platform to repay a customer his investment on the basis that they had not provided enough information surrounding the details of the investment. This article explores that decision and outlines what measures might be taken by a platform to prevent similar findings.


The Platform was and is a well-regarded, market-leading investment-based crowdfunding platform that promotes investment by way of pitches. Prospective investors can view information about a business and the details of the investment in these pitches on the Platform before deciding whether to invest. In return for their investment, they receive shares in the business.

The Investor made an investment in a food takeaway company (Company Z) via the Platform in 2016. The Investor invested around £18,000 in Company Z during this fundraising round. As Company Z substantially surpassed its initial £500,000 target, the round successfully closed in January 2018, and he was allocated shares.

Company Z entered into creditors’ voluntary liquidation, following a winding-up resolution passed by Company Z’s members in May 2020.

Prior to the liquidation, the Investor had requested that Company Z buy back his shares for the same price. He was not happy that Company Z had spent the investment in the manner they had outlined and he maintained that the information provided prior to the investment was misleading. Company Z refused to buy back his shares.

The Investor’s chief complaint was that Company Z did not use the funds raised to open new additional stores. The Investor complained that the information provided on the Platform led him to legitimately believe that the funds raised would be used to open new sites.

As company Z was not regulated by the FCA and had since been placed into liquidation, the Investor raised a complaint against the Platform and requested that they refund him his investment.

The Decision

The Ombudsman assessed what was fair and reasonable in all the circumstances of the complaint and made the following key observations and comments:

      1. The Ombudsman considered that there was “a distinct lack of information about what [Company Z] wanted to raise funds for”, and that the only information given by Company Z in their pitch on the Platform was:
        “Having grown from 2 sites to 4 since their last round on [Platform], [Company Z is] revolutionising the…takeout industry through its takeaway only locations with rapid delivery and custom technology. Now raising funds for further expansion.”
        The Ombudsman found that the “pitch provided no further clarification regarding what further expansion for [Company Z] entailed”.
      2. The Ombudman considered that the term “further expansion” preceded by “having grown from 2 sites to 4 since their last round” was sufficient to reasonably represent to the Investor that Company Z was going to use the funds raised to open up new stores. It was clear that the Investors decision to invest in Company Z was based on his understanding; the funds were going to be used to open new stores.
      3. The Ombudman considered that the issue of how a business intends to use funds raised through crowdfunding is essential information that should be provided to investors to make a reasoned decision to invest. Providing all relevant and essential information is especially important because the Platform was promoting high-risk, non-readily realisable securities to the Investor.
      4. The Ombudsman held that in providing its service to the Investor the Platform must:
        1. Conduct its business with due skill, care and diligence – Principle 2 (PRIN 2.1.1R (2)) []
        2. Pay due regard to the interests of its customers and treat them fairly - Principle 6 (PRIN 2.1.1R (6)) []
        3. Act honestly, fairly and professionally in accordance with the best interests of its client - COBS 2.1.1R (1) []
        4. Ensure that a communication or a financial promotion is fair, clear and not misleading - COBS 4.2.1R (1) []

        To determine whether the Platform had adhered to its regulatory obligations, the Ombudsman referred to the FCA’s consultation paper on loan-based (‘peer-to-peer’) and investment-based crowdfunding platforms for guidance. In this, the FCA explained:

        “It is our view that it will be unlikely that a platform could argue that it has met its obligations under Principle 2, Principle 6 (PRIN 2.1.1R) and the client’s best interests rule (COBS 2.1.1R) if it has not undertaken enough due diligence to satisfy itself on the essential information on which any communication or promotion is based.”

        The Ombudsman interpreted this to mean that the Platform had to satisfy itself on the essential information on which the promotion (pitch) of Company Z was based.

        The Ombudsman also drew attention to the FCA’s statement in the Consultation Paper regarding future commercial success, which explained that:

        In relation to statements about future commercial success, this should include at least a basic plausibility check. For example, if a borrower says it is going to build a block of flats within 6 months but it does not have the relevant construction permissions, it would seem reasonable for a platform to question the plausibility of the project.”

        On this point, the Ombudsman noted that the phrase “further expansion” was a statement about future commercial success. As such, the Platform should have conducted a plausibility check on this.     

        The Ombudsman noted that the particular due diligence process a platform should perform was not specified, nor was a set minimum standard of due diligence prescribed. The FCA recognised this in its March 2014 publication on the regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other media. However, the FCA did advise that:

        “Promotions will need to ensure that they comply with the rules, particularly the requirement for the promotion to be fair, clear and not misleading.
        In satisfying the financial promotion rules we expect sufficient detail to be provided to give a balanced indication of the benefits and the risk involved, including whether or not any due diligence has been carried out on an investee company, the extent of the due diligence, and the outcome of any analysis.”

        The Ombudsman interpreted this to mean that although there is no specifically  prescribed amount of due diligence a platform should perform, it was clear that in order to comply with the fair, clear and not misleading requirement,  the Platform needed to make the Investor aware of the extent of which it performed due diligence on Company Z. It should have let the Investor know that outcome of any due diligence carried out on an investee company, and the diligence required to be sufficiently detailed to allow the Investor to weigh up the risks and benefits in investing in Company Z.

        The FCA has since published its policy statement and new rules following the Consultation Paper. However, they provide little further guidance with respect to a situation such as this.

      5. The Ombudsman took the view that the Platform did not satisfy itself on the essential information on which the pitch was based and did not conduct a sufficient plausibility check on a relevant statement regarding future success. Specifically, the phrase “further expansion” was too vague in its meaning. The required due diligence standard set out by the Ombudsman had not been met  nor disclosed to the Investor in respect of the phrase “further expansion”, in particular in relation to whether this could or should be taken to mean that the funds would be used to open new stores.
      6. The Ombudsman set out that the Platform ought to have:
        1.  Asked what Company Z specifically meant by “further expansion” and made sure that was clarified as part of the pitch;
        2. On the assumption that “further expansion” meant to open up new stores, it should have checked if it was plausible by asking to see lease documentation, even if not finalised yet, it should have asked for evidence of agreements in principle or anything to demonstrate Company Z intended to open new stores.
        3. Disclosed the extent of the due diligence it carried out and disclosed the findings to the Investor. The Platform did test the plausibility by combining a Q&A with Company Z and evidence of its track record of opening new sites. The Ombudsman set out that although the track record was sufficiently verified, the fact that the plans for further expansion were at such an early stage that any documentary evidence could not verify them should have been clearly disclosed to the Investor.
      7. The Ombudsman decided to order the Platform to repay the Investor his investment. He was satisfied that the Investor would not have invested if he had known the full position regarding opening new stores. The repayment was to be less EIS tax relief etc.


There are a number of lessons from this decision that may be useful to Crowdfunding platforms:

  1. Any statements regarding future success or plans should be clear and concise. If a statement is too vague, it may be interpreted in an anticipated manner by an investor, although specific due diligence on the anticipated plans has not been carried out.
  2. Platforms should make readily available (within the reason of commercial sensitivity) the due diligence that has been carried out and its findings regarding any statement in respect of future plans.

The full decision can be found at This article has tried to summarise the key aspects of the decision. It is worth nothing that the Platform cooperated fully and, it was clear, had tried to comply with the regulation to the best of its understanding; to that extent the Platform was unlucky, as the guidance on these issues is still fledgling, and still being fleshed out. The result is, as the Platform found, that the guidance is not always clear and can result in unanticipated interpretations.


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