The anticipated revised upper limit for the feed-in-tariff (FIT) from 5MW to 10MW would benefit community energy projects, with many schemes in the 5-10MW range likely to seek funding in the coming years.
Well-structured opportunities, marketed on the right online platform and aimed at the right potential investors, make crowd funding a reliable and efficient method for getting projects like these off the ground. But it can be expensive when things go wrong.
Typically, there are four categories of funding; equity funding, where investors receive shares or an equity stake in the project; loan-based funding (peer-to-peer), where investors loan monies directly to the project; reward funding, where investors receive a specific reward related to the project; and donation funding, where investors receive nothing in return, and which is usually associated with charities.
Projects seeking funding are advertised on websites to attract retail investors along with professional and institutional investors. Any funds received are forwarded directly to the project. These platforms typically charge projects 0.5-2.5% for funds raised, plus an ongoing monitoring fee. Some will also charge the investors.
Crowd funding is a good alternative source of finance, helping to kickstart projects. It may avoid having to give security over its assets, or avoid the heavy dilution in equity share capital associated with equity and venture-capital investors.
Investors certainly have an appetite for it. Renewable-energy platform Abundance Generation has raised more than £6.5 million (EUR8.2 million) from around 1,400 investors for UK wind and solar projects in just three years. Crowd funding also allows investors to diversify their portfolios, with platform fees generally lower than those associated with managed funds. It lets the public invest in projects that might normally be restricted to professional investors.
The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and self-invested personal pensions (Sipp) offer the potential to wrap the investment in a tax-efficient way and still claim government incentives.
What are the risks?
Crowd funding is regulated by the Financial Conduct Authority (FCA) in the UK. Crowd-funded projects are usually small and might lack the infrastructure or personnel to achieve the proposed returns, but the risk is lower for those that can access guaranteed government-backed incentives, such as feed-in-tariffs.Investors usually have their money returned if the fundraising target is missed, but they will lose valuable interest if the opportunity takes months to resolve.
Raising capital through crowd funding is relatively risk-free for a community energy project, unless it fails to raise the minimum investment. Then the costs associated with preparing the offering documentation and utilising the platform is wasted.
The FCA requires platforms to include safety features should they run into financial difficulty. Also, loan-based and equity-based crowd-funding platforms must have full FCA authorisation. Crowd funding is relatively new and the advice for investors or community energy projects seeking funding through a platform, is to take the appropriate legal, financial and regulatory advice.
Jonathan Richards is a commercial solicitor in the energy, projects and commerce team at law firm SGH Martineau
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