When windy days are pay days

Estimated reading time: 2 min

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

1. You could lose all the money you invest
   • If the business you are investing in fails, there is a high risk that you will lose your money. Most start-up and early-stage businesses fail.
   • Advertised rates of return aren’t guaranteed. This is not a savings account. If the borrower doesn’t pay you back as agreed, you could earn less money than expected. A higher advertised rate of return means a higher risk of losing your money. If it looks too good to be true, it probably is.
   • Certain of these investments can be held in an Innovative Finance ISA (IFISA). An IFISA does not reduce the risk of the investment or protect you from losses, so you can still lose all your money. It only means that any potential returns will be tax free.
   • We carry out due diligence on the businesses, but it is your responsibility to decide whether to invest or not. You should do your own research before investing.
2. You are unlikely to get your money back quickly
   • Even if the business you invest in is successful, it will likely take several years to get your money back.
   • If you invested in shares, the most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
   • You are unlikely to be able to cash in your investment early by selling your bond. You are usually locked in until the business has paid you back over the period agreed.
3. 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.
4. 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.
   • These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.
5. 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.