To gamble, according to the dictionary, means: “to bet on an uncertain outcome”. To invest is to “lay out money with the expectation of profit”. Those of us with long-term savings and a penchant for lotteries, horses or online gaming will doubtless concur that the former should bring profits, while the latter will generally lead to losses. In any case, they are both activities involving substantial risk. Yet, that similarity is not reflected in the way the two are regulated.

Consider, for example, what consumers need to do to open three types of investment or gaming accounts. To open an online gambling account you simply have to tick a box to confirm that you are over 18. To open a spread betting account you need a valid debit card and a credit check which can take as little as three minutes, essentially to satisfy anti-money-laundering rules. To open an investment account with a crowdfunding platform you have to be able to work out your net assets or your net worth; understand the term ‘non-readily realisable securities’ and to calculate how much of them you already hold; gauge whether you are sophisticated enough to self-certify so that you can decide whether you are an Everyday Investor, Advised Investor, Self-certified Sophisticated Investor or a High Net Worth Investor; and the platform you sign up to has to be able to demonstrate to the Financial Conduct Authority (FCA) that it has verified this information.
 
The regulatory strictures don't reflect the risks. Research about online gaming losses compiled by The Wall Street Journal showed that while online gamblers won on 30% of the days they played, they continued to bet, and only 11% ended up with profits – many with as little as $150 – over the period analysed. Among those making large bets, only 5% ended up in the black. Spread betting investors not only risk losing their ‘stake’ – the deposit on the bet – losses can escalate well beyond the initial investment if their bet goes wrong. A report by the North American Securities Administrators Association found that 70% of investors will not only lose, but will lose everything they invest, while other analysts suggest the proportion could be far higher. 

A better recordCrowdfunding only started in 2011, so it is too early for definitively reliable statistics. But a report issued in November by alternative financial news site AltFi Data showed that four out of five companies that raised funds through this method between 2011 and 2013 are still trading, and that the portfolio return of the industry since foundation has been 2.17% – or substantially more if tax relief available to private company investors was used. Of course, there have been failures. The same report estimates that 28% of the cohort have collapsed or are in difficulty, but many have either gone on to raise more funds at a higher valuation or have given investors a profitable exit through a sale. So far, that gives crowdfunding a better record than other forms of angel investments, where as many as half fail in their first year or so.

70%
The proportion of spread betting investors who will lose everything they invest
Source: American Securities Administrators AssociationJulia Groves, Chair of the UK Crowdfunding Association and Director of renewables funder Trillion, said the association was formed three years ago in the face of a proposed threat by the FCA that only sophisticated or high net worth investors should be able to invest in crowdfunding projects. “We pointed out that the clue was in the name crowdfunding: it should not be restricted to the wealthy; instead, it’s a way of opening up the market,” she told the S&IR.

The rise of the everyday investorThis sparked the establishment of a new class of investor, an everyday investor, who has to certify that they will not invest more than 10% of their net realisable assets. Crowdfunding companies have to confirm investors’ status each year in writing, but everyday investors can choose to be classified as experienced when they have completed two fundings. The system, says Groves, is an appropriate balance between allowing access to funding opportunities and the high risk and lack of established exit routes among crowdfunded companies. 

Crowdfunding has, so far, attracted new and therefore potentially unsophisticated investors. A report on alternative finance by Nesta, produced in November 2014, found that 62% described themselves as retail investors with no previous experience of early stage or venture capital investment. Their average portfolio size was £4,000, while more experienced investors had twice that exposure. 

This type of funding and other forms of alternative finance have been growing strongly. AltFi Data’s report says that the industry is on course to raise £140m this year, up from just £28m in 2013, while other new financing methods such as peer-to-peer lending – where there are few restrictions on investors – are also enjoying robust growth. But gambling, too, has been on the increase. Statistics from the Gambling Commission show that remote betting, which includes online gaming, in the year to September 2014 – the most recent available – was £1.35bn. That’s more than double what it was in the year to March 2011. 

Growing awarenessLeighton Vaughan Williams, Director of the Betting Research Unit at Nottingham Business School, said the increase reflects wider access through internet and mobile technologies, and lower operator margins in an increasingly competitive market, but said that consumers also have “a growing awareness of risk and return”.

He adds that the regulation of betting has three key objectives: “The first is to prevent gambling from becoming, or being associated with, crime or disorder, or being used to support crime. The second is to ensure that gambling is conducted in a fair and open way. The third is to protect children and other vulnerable persons from being harmed or exploited by gambling.”  Preventing adults losing money is not included. 
"The rules have very little to do with regulation and everything to do with politics" That is in contrast to investment regulation. Stephen Hazell-Smith, a veteran small company expert who chairs Businessagent.com, a crowdfunding aggregator, thinks that the rules in the UK and in the US “have very little to do with regulation and everything to do with politics”. The FCA, he says, is “terrified” of an MP standing up in the UK Government’s House of Commons and highlighting crowdfunding losses suffered by a constituent and lambasting lax regulation. Given the huge cost and political furore caused by misselling scandals from payment protection insurance to private pensions, regulatory nervousness is understandable. The risk, however, is that this nervousness ends up strangling a vibrant market before it has had a chance to establish itself.

There is, therefore, considerable unrest in the industry about suggestions that the minimum investment in crowdfunding could be raised to £1,000. There is no indication that it is being driven by the FCA – indeed, it is more likely that some crowdfunding firms are finding it cumbersome to deal with hordes of small investors. Hazell-Smith says it is “not necessary”. He points out that many crowdfunding investors have an emotional connection with the company they fund, whether it's the firm's products or staff, and profit may not be the primary motive for investing: “If they want to put £100 into a company, why shouldn’t they? Why should investment be restricted to someone with a relatively high net worth?”