The Financial Services Authority should relax its rules on who can invest in companies to stop early stage technology companies from becoming victims of the recession, said the founder of a company that has taken an unusual approach to raise funds.
Charles Armstrong, founder of Trampoline Systems, has called on the City regulator to open up investing to more people to increase the sources of funding that struggling entrepreneurs can access.
Trampoline is pioneering a web-facilitated 'crowdfunding' process whereby it asks many small investors to take a stake in the company.
Companies traditionally ask a small handful of venture capitalists to invest millions of pounds at a time, but Trampoline is asking for 100 investors at £10,000 per stake in a bid to raise £1 million.
"This is a technique that's become quite well established in the film industry and in the music industry but it's really the first time that anybody's used it to finance a technology venture at the scale that Trampoline is operating at," Armstrong told podcast OUT-LAW Radio.
Trampoline has pioneered the process in the UK and has found that Financial Services Authority (FSA) rules designed to protect inexperienced consumers from being targeted by scams make crowdfunding more difficult.
Armstrong said that a company is not allowed even to approach or talk to anyone who has not certified themselves with the FSA as an experienced investor or a high net worth individual.
"Financial Services Authority were not drawn up with this kind of funding process in mind," he said. "We had to spend a lot of time understanding very closely what the different areas of regulation that this touched were."
"The FSA has a very important role to protect consumers from scams and that is an absolutely legitimate function that they serve," said Armstrong. "At the same time I think there is an argument for some reform of the regulations to enable crowdfunding techniques and other internet era investment techniquest to be operated with a little less bureaucracy around them."
Armstrong told OUT-LAW Radio that his company had turned to crowdfunding because more
traditional investors had retrenched and were investing more conservatively.
They are now either reducing the amount they invest or are investing only in companies that they have already supported in order to ensure their future, he said.
Trampoline makes software that enables people in companies to see who knows whom or who has particular knowledge. The software analyses people's communication patterns and builds a pattern of links between them.
The company announced its crowdfunding plan three weeks ago and has already raised £330,000, a third of its target. Armstrong said that he expected this figure to grow as more potential investors made their way through the FSA administrative process.
Trampoline is documenting its crowdfunding process online. Armstrong said that he believed such openness was in the spirit of the crowdfunding methodology.
"Part of what we're really hoping to achieve is to share the information about how we made it work so that it's easier for other businesses to consider the same course," he said. "I think that's part of the ethic of crowdfunding, that it's very much about being transparent."