how to...
Crowdfunding
for local authorities
part of our how to guide series on
finance and local economic growth
Introduction
Crowdfunding has created a frenzy in the business community and the creative sector because
of its ability to raise money quickly and flexibly, bypassing traditional sources of finance. But it
has yet to become as widely adopted among local authorities. This is in large part down to the
fact that councils are rightly cautious about new fads when it comes to handling public money.
However, much of this caution comes from confusion about what exactly crowdfunding is, how
it can be used in a local government context and how to weigh its risks and benefits. We hope
to shed some light on this area so that people working in local government can make informed
choices about if and how to get started.
There are three main types of crowdfunding:
●● Donations-based crowdfunding
●● Equity crowdfunding
●● Peer-to-peer (P2P) lending
These work in different ways that are accessible to different organisations and groups. This
guide will help you to unpick the different types of crowdfunding, their uses within and outside
local government, and contains practical tips for those who wish to give crowdfunding a try.
While this is still new territory for local government, it is cheering to note that crowdfunding
is already working well for many councils as we mention throughout the guide. It holds the
potential to raise money for local charities and social projects, to earn higher interest on council
savings, to plug funding gaps for services and to support local businesses and the economy.
These opportunities will be different in each area so we will give ideas rather than instructions.
Please note: You must not rely on the information in this guide as an alternative to legal/financial
advice from an appropriately qualified professional.
What can councils use crowdfunding for?
Donationsbased
crowdfunding
Equity
crowdfunding
Peerto-peer
lending
Raising money for the council/
council services
Depends on
circumstances*
No
Yes
Investing council money in local
businesses/social enterprises
Yes
Yes
Yes
Investing council money in local
charities
Yes
No
No
Distributing council money to
community projects
Yes
No
No
Supporting the local economy
by promoting local crowdfunding
campaigns run by local
businesses/social enterprises
Yes
Yes
No
Encouraging individuals and
organisations to donate to
community projects
Yes
No
No
Helping local businesses/social
enterprises raise money through
crowdfunding
Yes
Yes
Yes
Helping community projects to
raise money for projects through
crowdfunding
Yes
No
No
*Crowdfunding involves getting the public excited and engaged enough to support campaigns.
If the council was running a campaign asking the public for direct donations, the public would
most likely see it as giving the council more money, on top of council tax, and would be turned
off by the prospect.
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LGiU | Crowdfunding for local authorities
Who can raise investment/borrow money through
crowdfunding platforms?
Donations-based
crowdfunding
Equity
crowdfunding
Peer-to-peer
lending
Local authority
Depends on
circumstances*
No
Yes
Business
Yes
Yes
Yes
Social enterprise
Yes
Yes
No
Individual
Yes
No
Yes
Community project
Yes
No
No
Charity
Yes
No
No
* As mentioned on the previous page, although local authorities are able to raise money for
themselves through donations-based crowdfunding, it may not appeal to the public.
These tables are intended to give you an overview of the possibilities attached to each type of
crowdfunding. However different platforms operate in different ways.
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LGiU | Crowdfunding for local authorities
Donations-based crowdfunding
Platforms include Spacehive, Kickstarter, Indiegogo and Crowdfunder
This type of funding involves people donating money towards a project, product or business.
Unlike equity or debt funding, investors have no expectation of seeing that money again – it is
comparable to donating to charity.
A range of people and organisations list on this type of platform – film students, museums,
inventors, startups, charities, social enterprises, academics… There is a strong appeal in
getting something for (essentially) nothing!
Many councils are already using this type of crowdfunding with great success for a variety
of purposes. Some say that they have increased community engagement through running
crowdfunding projects and are able to direct their support to the things that residents care about
most. Instead of the council deciding which organisations need grant funding, the residents can
decide themselves.
How does it work?
A target funding amount is set by the individual or organisation that is raising money, and the
campaign is listed online. Anyone can donate – individuals, organisations, local authorities, etc.
– and they are able to contribute however much they feel like giving . The organisation must
reach its target amount in order to receive any of the money. If the target total is reached by the
deadline, the money is taken from those that have pledged; if not, no money is taken at all. The
platform acts as an intermediary, handling the money.
Sometimes the person or organisation raising money will offer non-monetary rewards for the
investment – such as preview screening tickets for a film, one of the first batch of products,
keyrings, or your name in the acknowledgements. But for some investors, the satisfaction of
having contributed to a worthwhile project or an improvement of their local area is enough. In
Nesta’s 2014 report ‘Understanding Alternative Finance’, they found that “when choosing which
campaigns to back, more than 60 per cent of backers valued the quality of the idea, the team
and knowing their money was making a difference.”
Use in local authorities
4
●●
Councils can encourage residents to contribute to local projects run by charities,
community groups or individuals. They can also use their unique position of influence
within the community to convene resource from other stakeholders, and make it available
to project creators. Manchester City Council and 16 London Boroughs have done this with
the help of Spacehive, a civic crowdfunding platform. Residents, businesses and councils
can donate to ideas posted on the website. The public take ownership in delivering projects
- reducing the burden on the local authority.
●●
Councils can leverage their existing funding streams by offering to match funding from
the crowd for community projects. Some councils, including Dorset and Plymouth, have
partnered with Crowdfunder to attract applications for community projects, with the
promise of matched funding from the council if the crowd contributes.
●●
Councils can also look for ideas about where to put their resources by looking at local
projects that have been successfully crowdfunded. This gives the council a good idea of
what issues and projects matter to their residents. For instance, in response to Liverpool
LGiU | Crowdfunding for local authorities
People donate money to a project
they believe in, which is listed on a
crowdfunding website, eg new play
equipment for their local park
If the project raises its target funding
amount it goes ahead. In this case
new play equipment is purchased for
local children to enjoy!
Sometimes the project organiser will offer non-monetary ‘rewards’ for people who
donate money, such as VIP passes to the opening of a film they have funded
City Council’s proposal to remove an abandoned flyover, the local community crowdfunded
over £40,000 to pay for a feasibility study looking at creating an elevated park instead.
Top tips
Raising money
5
●●
There is little financial risk involved for councils wishing to raise money from the crowd
through this type of platform. The main consideration is how the community will respond.
Depending on what the council is raising money for it is possible that residents may
perceive your fundraising efforts as an additional tax for services they already expect from
their council. However if the project is developed alongside the community, you have a
much better chance of achieving buy-in to the idea and therefore raising money.
●●
According to councils that have tried raising money through donations-based
crowdfunding, smaller localised projects seem to work well. Encouraging residents to
donate to projects that are less fun, accessible or personal, like infrastructure or ongoing maintenance costs, is likely to be quite a hard sell. In general, donations-based
crowdfunding is good for augmenting existing council spending, but shouldn’t be used to
fully replace it for most services.
●●
It may be preferable to use existing crowdfunding platforms than to design your own. When
spending money online, people tend to prefer a familiar site as a reassurance that their
money is safe. Moreover, the design of crowdfunding platforms is rapidly evolving to maximise
the user experience and maintaining your own to the same standard would be very difficult.
LGiU | Crowdfunding for local authorities
Investing money
●●
When donating to a project, or encouraging others to do so, you should do some
background research on the individual or organisation behind it to make sure they are
credible, contactable and are really doing what they say they are doing. If necessary, ask
your financial advisor to conduct due diligence to uncover any past bankruptcies or fraud
convictions.
●●
It’s worth bearing in mind that there is no guarantee that the project will be completed, will
be a success or that the people listing it intend to work on it at all. Platforms are trying to
crack down on this (for example by requiring those listing on the platform to sign a contract
saying they will deliver their project, as Spacehive does) and doing your own research will
also help minimise the risk.
●●
You should take the usual sensible precautions when investing council money into external
projects. As with any other type of grant funding, you may wish to offer the money in
tranches upon reaching certain milestones, or to ensure that projects commit to delivering
defined goals.
Case Study: Lewisham Council
“We see Spacehive being used as a way to make the local voluntary and community
sector more sustainable by building their skills and capacity as well as diversifying their
fundraising strategies.”
Winston Castello, Community Enterprise Manager, Lewisham Council
When the London Borough of Lewisham adopted civic crowdfunding in 2015 as a way to
distribute their grants, they were not just looking to address reduced resources but were also
working towards creating a more sustainable funding model for community projects as well as
building the skills and capacity of local organisations.
Using an existing funding pot of £100,000, the council invited local groups to upload their project
ideas to Spacehive and demonstrate community support through attracting pledges. The
council then pledged up to £10,000 towards the most popular projects.
Since the Council’s fund launched on Spacehive, 36 projects have been successfully
crowdfunded, raising £323,000 from more than 1,300 backers. Following Lewisham Council’s
lead, other local organisations including Lewisham Homes, idverde UK, GLL, Lendlease, Veolia
and the Esmée Fairbairn Foundation have since set up their own matched funds on Spacehive,
meaning the ecosystem of match funding available for Lewisham projects has now more than
trebled to £350,000.
The success of the initiative has encouraged the council to begin exploring the role civic
crowdfunding could play in their wider regeneration plans. What started off as one funding pot
has catalysed the growth of a vibrant ecology of ideas and funding. Residents are empowered
to become change-makers within the community through creating and delivering projects that
matter to them.
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LGiU | Crowdfunding for local authorities
Equity crowdfunding
Platforms include Crowdcube, Seedrs and Syndicate Room
Equity crowdfunding is mainly used by young, high-growth businesses looking for money to
grow. It falls into the broader category of equity investment, which includes venture capital and
private equity firms. Equity crowdfunding platforms take the equity investment process online
and open it up to a wider pool of potential investors – the ‘crowd’.
Equity investment involves the company raising money from investors, who then own shares
in the company. At some point in the future, if the company has grown well, the investors can
sell their shares for a much higher price than they paid for them. However, if the company fails,
they will not receive any of their money back. It is high-risk for investors but if they bet on the
right horse, they can earn several times their initial investment. However with equity investment
there is no guarantee that you’ll see your money again if the business fails, so investors must be
prepared to lose all the money they invest. Equity investment is popular with young companies
that are too risky for banks and other lenders because they aren’t yet profitable or don’t have
any assets to borrow against.
Until crowdfunding platforms came along, equity investment was the domain of venture capital
funds, pension funds, and professional investors called ‘business angels’, who can commit
large amounts. With equity crowdfunding, ordinary investors with less money to invest can get
involved too – the online platforms allow lots of people to give smaller amounts, without a huge
administrative burden for the company.
How does it work?
Only private companies with share capital can raise money through equity crowdfunding
platforms (i.e. not charities, companies limited by guarantee or public bodies). This is because
they must be able to give away legal ownership of part of the organisation, so councils would not
be able to raise money this way.
Equity crowdfunding is usually facilitated by an online platform which acts as an intermediary
between the company raising money and the investors. The crowdfunding platform is
responsible for finding suitable companies to list on their website and conducting some
background research on them. Once they have been vetted, the company profile is listed
on the crowdfunding platform, along with a target fundraising amount and how much of the
company they are giving away (in the diagram, Drinks co. is raising £30 and giving away 10
per cent of its shares).
Individuals browse through the companies listed on the crowdfunding website and can invest
any amount they choose in companies they like the sound of. If the company’s target amount
is reached by their deadline, the investment is allowed to move forward – the company takes
the money and the investors receive their shares. If the total isn’t reached, the money will be
returned to the crowd and the investment will not go ahead.
Unlike on the public stock market, there is currently no simple way of re-selling shares in
private (unlisted) companies once you have invested. This means that your money is effectively
tied up until the company ‘exits’ (e.g. by listing on a stock exchange or being bought out). This
usually takes between 5 and 10 years, depending on the sector of the business and the point
at which you invest, but will be dependent on circumstances and is not a fixed date unlike with
bank loans.
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LGiU | Crowdfunding for local authorities
A company
decides to
raise money
by selling
some of
its shares
through a
crowd funding
website
In this example Drinks
Co. is selling 10% of
its shares at a price pf
£30.Crowd investors
can choose how much
they want to invest and
therefore how many
shares they buy.
After a few years, if the company
has been successful, crowd
investors will be able to sell their
shares for much more than they
were bought for originally. In
this example the investors have
increased their money tenfold.
OR
However if the
company has not been
successful, crowd
investors will not be
able to sell their shares
and will not receive any
of their original money.
Use in local authorities
8
●●
Councils could invest into any local companies that have been listed on equity
crowdfunding platforms, with the aim of supporting local economic growth. Lancashire
County Council became the first council to try this when they invested in local businesses
via the Crowdcube platform in August 2016.
●●
As part of their Treasury management, councils could invest their reserves in businesses
through equity crowdfunding platforms as a way of earning a higher return on the council
savings. It’s worth remembering that this should be part of a diversified portfolio of
investments including some with a lower risk profile.
●●
Councils could get involved with equity crowdfunding as a facilitator rather than an investor,
by brokering relationships between local businesses that need finance and the platforms
themselves.
●●
Remember, councils cannot raise money for themselves through equity crowdfunding
platforms – because they do not have any shares to sell!
LGiU | Crowdfunding for local authorities
Top tips
9
●●
Equity crowdfunding is still a very young industry (roughly six-years-old) and because it
takes several years to tell if an equity investment has been successful, it’s very difficult to
judge how risky equity crowdfunding is – both compared with regular equity investing and
with other forms of investment.
●●
Remember that you must be prepared to lose the whole amount of your investment and that
you cannot rely on the money being returned to you by any specific time.
●●
Always seek independent financial advice. Advisors will be able to tell you if you’re getting
good value for money by looking at factors such as the stage of the company’s growth, the
sector it’s in and the company’s financial history. Although platforms usually conduct their
own background research, the extent and rigour varies between platforms so you should
always seek independent reassurance.
●●
Ask your lawyer to check the investment terms. In many cases, ‘crowd’ investors will
receive non-preference shares, which means that they will be at the bottom of the pile if
the company fails and any assets are divided up between investors.
●●
Ask your lawyer to check for non-dilution clauses. Dilution of your investment value is a
danger with equity investing if the contract isn’t watertight, and may lead to your shares
being worth much less than you anticipated. For example, you might buy 100 shares
which comprise 10 per cent of the company’s 1000 shares. Then in a year’s time the
company raises another investment and creates 1000 new shares to divvy up among new
investors, making 2000 shares in total. Suddenly your 100 shares are only worth 5 per
cent of the company. You need to check you have a non-dilution clause to prevent this
from happening.
●●
Do your research about any equity crowdfunding platform you plan to invest through. Do
they also invest in the company themselves, proving their commitment to the business
plan? Do they manage your shares for you? Have they been in any hot water over their
methods? How long have they been operating? How many companies have successfully
raised funding through their platform? And how many failures have there been (always
remembering that failures could take a few years to appear)?
LGiU | Crowdfunding for local authorities
Peer-to-Peer (P2P) lending
Platforms include Funding Circle, Ratesetter, Thincats and Zopa
Peer-to-peer lending is a funding method that bypasses banks, by matching a borrower directly
with an individual or organisation with money to lend. The idea is that, by cutting out the middle
man, the lender will earn higher returns on their money compared with putting it in a standard
bank account, and the borrower will benefit from a faster, more flexible process and competitive
interest rates.
Peer-to-peer lending is often used by businesses (e.g. through Funding Circle and ThinCats),
but in theory any type of borrower can use this form of funding. People have been known to
borrow for personal mortgages, student loans and more (e.g. through Zopa and Ratesetter).
Typically businesses that seek debt finance are more established, profitable and have assets
such as property and equipment to borrow against, as opposed to young startups which often
seek equity. This can go some way to reducing the risk that the borrower will be unable to repay
the loan. However, most platforms offer an indication of each borrower’s level of risk.
How does it work?
Peer-to-peer lending can work in different ways depending on who is lending and who is
borrowing, and which platform is being used.
Typically, lenders can pick and choose from the selection of borrowers listed on the website,
according to how much they want to invest and how much risk they want to take on. So as
a lender you would see a list of companies, alongside information including: how much they
are asking for; what interest rate they will be paying based on risk and how long they need
the money for. Once the funding has been distributed, the borrower will then make monthly
repayments, along with interest, that is distributed to the lenders.
From the borrowers’ perspective, they can apply for a loan online in as little as 10 minutes, and
receive a decision within 48 hours. After a credit assessment, the loan is given a risk band
(indicating how much interest investors will earn) and then listed on the platform.
On some platforms there is a secondary market, where you can buy and sell parts of existing
loans before the repayment date, allowing investors to access their money before the end of the
loan term (if they are able to find a buyer, of course).
A number of local authorities now use peer-to-peer lending platforms. Some use their economic
development funds as a means of lending to local small businesses, whilst others use treasury
funds to lend across the UK as a way of earning attractive returns. When using economic
development funding, local authorities use platforms to directly target small businesses in their
region; the platform sources the borrower and carries out a credit assessment of each one.
Funds are then allocated from the local authority based on their lending criteria. Platforms take
care of all payments, thus reducing the administrative burden on the government body while
helping them to meet their economic growth aims.
Central government is also using platforms to inject funding into UK small businesses. Most
notably, the Government-owned British Business Bank (BBB) has lent millions through
platforms like Funding Circle, MarketInvoice and Ratesetter. This enables the Government to
lend to thousands of businesses across the UK, whilst also earning reliable returns.
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LGiU | Crowdfunding for local authorities
Peer-to-peer loans are like normal
bank loans, except without the bank
being involved. They can be used to
fund all the same types of things businesses, property, buying a new
car, etc. The platforms link lenders
directly with borrowers.
After an agreed amount of time, the
borrower must repay the load, plus
interest, to the lender.
Use in local authorities
11
●●
Councils can use P2P lending platforms as a way of managing their investments into local
businesses they have identified as needing support. This is already being done by many
councils including Camden and Lambeth.
●●
Equally, councils could in theory invest in social enterprises, local charities or other
organisations in a similar manner, but not through the more established platforms.
●●
As part of their Treasury management, councils could invest their reserves through P2P
lending platforms, if the investment options available suit their risk appetite. Equally, they
could apply to borrow money for bigger projects themselves. For instance, Warrington
Council has set up its own P2P lending platform which facilitates lending between public
sector organisations.
●●
Councils could get involved with P2P lending as a facilitator rather than an investor, by
brokering relationships between local organisations needing finance and the platforms
themselves.
LGiU | Crowdfunding for local authorities
Top tips
12
●●
Peer-to-peer lending is still a relatively young industry (roughly 10 years old), but the
industry’s largest platforms set up a self-regulatory body in 2011 called the Peer-to-Peer
Finance Association (P2PFA), which promotes high standards of conduct and consumer
protection on top of the full set of regulations set by the Financial Conduct Authority - so
these are a good place to start.
●●
Whilst some platforms have had some issues recently, debt crowdfunding is a more
developed market than equity crowdfunding and lending is usually much lower risk than
equity investing in general. Make sure you research the platform you intend to work with.
●●
Whilst platforms carry out thorough credit assessment checks on all borrowers before they
are listed on the platform, the best way to mitigate risk as an investor is to diversify your
investment across as many borrowers as possible. Investors should expect borrowers to
default as this is a very normal part of lending, but by spreading your investment across as
many borrowers as possible, you reduce the impact of bad debt on your portfolio.
●●
Platforms provide credit checking of borrowers but your investment is not covered by the
Financial Services Compensation Scheme. Some platforms offer a ‘bad debt guarantee’,
where losses are offset by a ‘provision fund’ that is funded by investors when they first start
lending. A stated priority in the FCA’s regulation of the sector is that platforms have full
wind down plans in place so that investors still receive loan repayments in the event of a
platform ceasing to trade. Even so, it is worth checking what might happen to your money if
the platform itself shuts down.
●●
Remember that lending through these platforms is an investment, so your capital is at risk
and returns are never guaranteed – regardless of any bad debt provision funds. You must
be prepared to lose the whole amount of your investment.
●●
A large majority of lending through platforms is unsecured with a personal guarantee, so
you should use platforms’ historical loss rates as a good indication of a platforms’ credit
assessment capabilities. These can all be found on the P2PFA’s website.
●●
Most platforms offer a secondary market so you can sell your loans if you choose to leave
the platform before the loan matures so bear this in mind when choosing a platform.
●●
Always seek independent financial advice. Whilst an adviser won’t advise you on each and
every £20 investment you make through a platform; they will be able to guide you towards
a suitable platform based on the type of lending you want on your portfolio i.e. business,
consumer or property lending.
●●
Always consult with a lawyer. Ask them to check the investment terms. Whether you are
borrowing or lending, what will happen in the event the borrower cannot repay the loan? Do
some investors have a preferential agreement? What happens to the loan agreement in the
event that the platform closes down?
●●
Do your research about any P2P lending platform you plan to invest through. Start
with members of the P2PFA, who adhere to rigorous self-imposed standards to ensure
consumer protection. Have they been in any hot water over their methods? How long have
they been operating? What is the default rate of businesses listed on their platform (always
remembering that these could take a few years to appear)? How do they conduct their due
diligence? Will they cover your investment if the borrower defaults?
LGiU | Crowdfunding for local authorities
What next?
The first step is to assess your own council’s strategic priorities and work out if crowdfunding
can help to achieve any of these; there is no sense in adopting crowdfunding for the sake of it!
At the very least it makes sense for those working in local government to educate themselves
about their options with regards to crowdfunding, to be able to make informed decisions and
construct persuasive business cases if the time comes.
As funding cuts continue to put a strain on both statutory and discretionary services alike,
increasing public engagement with community services will become even more essential.
Asking the community to prioritise and fund their own projects could have the threefold benefit
of involving residents, continuing important services and reducing the financial burden on the
council.
Equally, in the context of 100% business rate retention being implemented in the next few years,
councils may increasingly be looking for ways to attract and retain businesses in their region,
and crowdfunding may be a way of achieving this.
This guide is part of LGiU’s local government finance programme for 2017. We will be exploring
innovative ways for councils to support their local economy and bolster public service delivery,
such as using social impact bonds, supporting entrepreneur hubs, and leveraging council
savings in new ways.
We are really keen to hear how you get on so please get in touch with any thoughts, advice and
examples of crowdfunding working (or not working) so we can keep sharing best practice within
local government.
Get in touch by email: [email protected]
Join our LinkedIn Group: linkedin.com/groups/LGiU-Policy-8588500/about
Sign up to our monthly Finance policy update: www.lgiu.org.uk/policy-theme/finance
Speak to Spacehive: [email protected]
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LGiU | Crowdfunding for local authorities
Links
Plymouth City Council: https://www.plymouth.ac.uk/news/plymouth-university-welcomes-thelaunch-of-crowdfund-plymouth-which-will-provide-_60000-to-local-projects
Dorset County Council: http://www.dorsetecho.co.uk/news/14562293.Dorset_County_
Council_to_crowdfund_youth_projects/?ref=rss
http://www.crowdfundinsider.com/2016/06/86961-crowdfunder-uk-teams-up-with-dorset-countycouncil-to-offer-crowdfunding-youth-projects-200000/
Warrington Council: http://www.socialhousing.co.uk/council-and-funding-adviser-launch-peerto-peer-lending-platform/7014362.article
London Borough of Lambeth: https://www.fundingcircle.com/blog/press-release/lambethcouncil-to-finance-local-business-growth-through-funding-circle/
London Borough of Camden: https://www.fundingcircle.com/blog/press-release/camden-firstlondon-council-finance-local-business-growth-funding-circle/
Liverpool City Council: http://www.independent.co.uk/news/uk/crowdfunding-gets-liverpool-selevated-park-off-the-ground-9318140.html
General
http://www.nesta.org.uk/blog/big-and-small-funders-learning-play-together
https://www.nesta.org.uk/sites/default/files/understanding-alternative-finance-2014.pdf
https://www.theguardian.com/local-government-network/2013/may/29/crowdfunding-wayforward-for-councils
http://p2pfa.info/
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LGiU | Crowdfunding for local authorities
Author: Jennifer Glover, LGiU
LGiU is an award winning think-tank and local authority membership
organisation. Our mission is to strengthen local democracy to put citizens in
control of their own lives, communities and local services. We work with local
councils and other public services providers, along with a wider network of
public, private and third sector organisations.
Spacehive is an award-winning crowdfunding platform for civic projects,
designed in the UK with the help of thousands of citizens, government,
businesses and grant-makers. The platform aims to make it as easy as possible
for people with ideas for improving their local area to attract the support and
funding they need to deliver them.
To do this, Spacehive has streamlined key processes involved in proposing,
funding and delivering projects – from checking the viability of ideas to
identifying and applying for funding from grant-makers and the “crowd” at the
same time, and reporting back on the impact they make.
Cities are rich with creativity and resource. Spacehive allows collaboration
across silos like never before, empowering changemakers to create vibrant civic
spaces that boost quality of life and the local economy. It’s a model that works
for community change-makers and works for cities.
LGiU
Third Floor,
251 Pentonville Road,
London N1 9NG
020 7554 2800
[email protected]
www.lgiu.org.uk
© LGiU March 2017