Our views on the real problems with ECF and some solutions

Here are our thoughts on the fundamental problems with ECF as we run it in the UK and some suggestions.

1. You cannot put a brand new technology into an old system and expect them to work together in harmony.

In this case the new technology is ECF and the old system is the way we run the accounting, tax and company systems in this country. ECF was and still is a ground breaking new way of funding businesses, brought about by the connectivity of the Internet. Its very fast and very direct, completely the opposite of the old ways. Its far more open to abuse than the old system and its needs to be regulated - not by the old system , which cannot cope, but by a totally new regulation which in turn uses the Internet as well. It was ever thus, from the start of the Industrial Revolution - new machines simply dont fit into the old ways. How can they?

2. ECF is in effect a non market market. 

The current system with raising funding via ECF, uses ECF platforms and precludes the real market. The LSE doesnt go around setting company prices  - it lets the market and so called experts do that. We need a system for ECF where the share price and therefore the value of the company is set by the market not the platform in cahoots with the founders. This would certainly help to prevent the ridiculous over pricing we are seeing currently. ECF platform talk about their businesses bringing democracy to business funding when in effect they do almost the opposite.

3. More rigorous regulation will mean higher up front costs for companies. We dont want that.

So the answer might be to tweak the way the rebate system under S/EIS works. At the moment all of this rebate is handed back to the investor. Why cant we look at a way of taking at least part of this and using it to pay for better due diligence and company reporting? After all S/EIS was not set up to help line the pockets of foolish investors. It was an attempt by Government to help funding into SMEs. At the moment it only helps investors directly. We need to shift the centre of emphasis.

4. By funding poor business ideas run by poor managers on abysmal plans, we are throwing away a great chance.

Surely for the longer term gain, we need a better system of analysing who gets S/EIS and in turn who can use ECF. Nobody is going to gain by having the public invest in whole raft of dead end businesses, possibly set up with the best intentions. Best intentions dont cut it in the real world. We have certainly seen enough business plans and their results since 2011 to strongly suggest that too many hopeless cases are getting through the net. The holes are just far too large.

5. Sanctions - they need to mean something.

There is no point in issuing FCA licenses if the FCA is never going to make companies adhere to their regulations. Ban all third party licensees from taking part in ECF.

6. A more coherent longer term model

The UK's largest ECF platform simply gets the money in and then leaves the room. Their follow up is merely for their own PR. They actively downplay their disasters and often invent success. That is not the way forward.

ECF platforms and some now do this, need to reflect on the ASSOB model. It should be a much longer term relationship. Platforms could learn from the failures instead of excusing them, if they took more time with the companies. They could also help companies with an advice service if they employed the right people. Sadly for most that isnt the case right now.