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Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
- You could lose all the money you invest
- If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
- Checks on the businesses you are investing in, such as how well they are expected to perform, may not have been carried out by the platform you are investing through. You should do your own research before investing.
- You won't get your money back quickly
- Even if the business you invest in is successful, investment projects can overrun which can extend the length of time your funds are tied up in the investment.
- Property investment projects and start-up businesses rarely offer to pay you back through dividends. You should not expect to get your money back this way.
- The platform does not offer a secondary market. While another investor may be interested in buying your investment, there is no guarantee you will find a buyer at the price you are willing to sell.
- Don’t put all your eggs in one basket
- Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
- The value of your investment can be reduced
- If your investment is shares, the percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
- Any new shares or additional borrowing may be payable before the existing shares which could further reduce your chances of getting a return on your investment.
- You are unlikely to be protected if something goes wrong
- Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here.
- Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.
If you are interested in learning more about how to protect yourself, visit the FCA’s website here.
For further information about investment-based crowdfunding, visit the FCA’s website here.