Crowdfunding has become a common way to raise money, particularly for start-ups, charities, community projects and new ideas that might struggle to secure traditional funding. Platforms make it easy to reach a wide audience quickly, and the ability for lots of people to contribute relatively small amounts can make ambitious funding targets feel more realistic and achievable. For many clients, this type of funding feels modern, flexible and accessible.
For law firms, that does not mean crowdfunding is off-limits. But it does mean firms need to understand what sort of crowdfunding they are dealing with, how the money is being raised, and whether they can get comfortable with the source of funds and the overall risk profile.
While crowdfunding can open doors, it also brings a number of risks that should not be underestimated. From a legal and regulatory point of view, crowdfunding is rarely as straightforward as it first appears, especially when large numbers of contributors or significant sums of money are involved.
In its most recent sectoral risk assessment, the SRA has highlighted crowdfunding and pooled funding arrangements as risk areas for law firms. That is an important reminder that firms must be alert to the compliance challenges that can come with this type of work. It does not mean firms cannot act in these matters. It means they need to take a properly risk-based approach.
In practice, the issues often arise where money from multiple contributors is pooled together, particularly if the structure is informal, the contributors are not well known, or the audit trail is poor. In those situations, tracing who has paid what, and where the money has come from, can become much more difficult.
Why crowdfunding is seen as higher risk
Crowdfunding is seen as higher risk for several reasons, many of which are built into the way these arrangements operate. Transactions can involve a degree of anonymity, funds can move quickly, and campaigns can change direction with little warning. All of these features can increase the risk of money laundering, fraud, or sanctioned funds entering the picture.
One of the main concerns is visibility. Some crowdfunding platforms allow people to contribute using aliases, screen names or intermediaries. When a campaign attracts hundreds or even thousands of contributions, it quickly becomes harder to understand who is behind the money and whether the overall source of funds picture makes sense. Even if most contributions are entirely legitimate, the volume alone can make meaningful scrutiny more difficult and time-consuming. The key issue for firms is whether they can obtain enough information about the funding structure and the money flowing into the matter to be comfortable that the risks are understood and appropriately managed.
Speed is another factor. Crowdfunding campaigns can raise large sums in a short period of time, and funds may be transferred or paid out much faster than through more traditional arrangements. That can leave limited time for checks and intervention if something suspicious is identified. By the time concerns are raised, funds may already have moved on.
Crowdfunding arrangements are also flexible, which can add to the risk. Funding targets, the stated purpose of the campaign, and even the parties involved can change part way through, sometimes with little explanation. Legitimate changes do happen, but that flexibility can also be exploited by those looking to obscure the movement of funds or shift money quickly before red flags are picked up.
Crowdfunding may also sit alongside other higher-risk features, such as pooled investments or cross-border transactions, which further complicate the picture.
That said, not all crowdfunding arrangements present the same level of risk. A structured raise through a well-known platform, with a clear paper trail and a coherent explanation of how the funds are being used, is very different from an informal arrangement where money arrives from multiple unknown third parties shortly before a transaction completes. The regulatory question is not whether crowdfunding is automatically unacceptable. It is whether the firm can understand the risks well enough to proceed safely.
Source of funds is a major challenge
One of the most difficult aspects of crowdfunding is establishing the source of funds. When money comes from a large number of contributors, often based in different places, tracing where each contribution originated and whether it appears legitimate can be extremely challenging. Without a clear understanding of the source of funds, it becomes much harder to assess overall risk or identify potential criminal activity.
The situation becomes even more complex when contributors are based overseas. Different jurisdictions have different regulatory standards and levels of oversight, but UK law firms are still expected to meet their own obligations. Firms need to be able to show that they have taken reasonable steps to understand where funds come from and to assess the financial crime risks properly.
Some contributors may want a degree of privacy for perfectly innocent reasons. That does not remove the firm’s responsibility to carry out appropriate checks. Firms cannot simply ignore the issue because a platform or structure gives limited visibility. Instead, they need to assess whether the information available is sufficient for the level of risk involved. If it is not, that may mean further enquiries, enhanced due diligence, or in some cases deciding not to act.
This is why thorough risk assessments and due diligence (possibly enhanced) are so important in crowdfunding matters. Firms should ask clear questions about why funds are being raised, how contributors are connected to the client, and how the money will ultimately be used. If a campaign’s stated purpose does not match what is happening in practice, or if details change without a clear and logical explanation, those are warning signs that should be explored further.
A useful starting point is to distinguish between the client and the wider funding base. In some matters, the firm may be able to get comfortable with the arrangement by understanding the client, the structure, the route of funds and the overall risk profile. In others, the nature of the transaction may mean the firm needs much greater visibility of individual contributors or categories of contributors. The more opaque the arrangement, the harder that becomes.
Practical scenarios
Crowdfunding is not one single model. The practical compliance response will depend heavily on the facts.
Take a start-up equity raise. A start-up may raise investment through a recognised online platform. There may be a clear explanation of the business, the investment terms may be documented, and the money may come through a structured process. This may still require careful due diligence, but it is likely to be easier to manage than an informal fundraising exercise because the structure and funding route are clearer.
A property crowdfunding scheme is often more difficult. A client may want to acquire a property using pooled contributions from multiple investors through a special purpose vehicle. Some investors may be overseas and the funds may be arriving from different accounts. This is likely to be a much higher-risk scenario. The firm will need to understand the structure, the relevant parties and whether it has sufficient visibility of the incoming funds before it can decide whether it is comfortable acting.
A business start-up funded by friends and family may sit somewhere in the middle. A new business may be funded by contributions from a small group of family members and close contacts, all of whom are identifiable and can be sensibly linked to the project. That does not remove the need for checks, but it is usually easier to understand and evidence than a diffuse online campaign involving large numbers of unknown contributors.
A community fundraising project may also be manageable, depending on the facts. A local group may raise money to save a village pub, sports club or community shop. There may be a high number of contributors, but the purpose is public, the campaign is visible, and the governance may be straightforward. Again, the issue is not that this cannot be done. It is whether the firm can understand the structure and document a proportionate approach to risk.
Practical steps for law firms
Because of the risks involved, law firms need to take a careful and structured approach when dealing with crowdfunding or pooled funds. That means putting practical safeguards in place and applying them consistently.
Customer due diligence is the starting point. Firms need to be clear about who the client is, what the matter involves, how the funding is structured, and what level of scrutiny is needed in light of the risks. That includes checking identity, carrying out sanctions screening where appropriate, and considering whether any politically exposed persons or other higher-risk features are involved. Where there are large numbers of contributors, overseas funders or a more complex funding structure, firms may need additional information, specialist tools or external support to get comfortable with the matter.
Risk assessments at both firm and matter level are also essential. Crowdfunding should be treated as a potential risk factor that needs proper consideration. Firms should carry out matter-specific risk assessments and make sure their wider firm-wide assessment reflects the kinds of crowdfunding or pooled funding work they may encounter. These assessments should not be static. They need to be reviewed and updated if circumstances change. Staff should be trained to recognise warning signs early and know when and how to escalate concerns.
Where higher risks are identified, enhanced due diligence may be needed. This may involve deeper checks into the source of wealth, closer scrutiny of complex ownership or funding structures, and ongoing monitoring throughout the life of the matter. It is important for firms to record why enhanced due diligence was required and what was done in response.
In practical terms, firms should be asking questions such as: who exactly is our client; how is the money being raised; where will the money arrive from; are we dealing with a regulated platform or an informal arrangement; are there overseas contributors, intermediaries or unexplained changes to the funding model; and can we explain and evidence why our level of due diligence is proportionate?
Recording and acting on what you find
Carrying out checks is only part of the process. Law firms also need to make sure everything is properly documented. Clear records of due diligence, risk assessments and any enhanced due diligence are essential, particularly if the firm is later reviewed by the regulator.
If the firm cannot obtain enough information to apply an appropriate level of due diligence, it should not proceed. Walking away from a transaction can be difficult, especially where a client is eager to move forward, but it may be the safest option. Firms should also keep records of matters they decline and, where appropriate, consider whether a report is needed.
Regularly reviewing this documentation can bring wider benefits too. It allows firms to identify patterns, learn from previous cases and strengthen their approach over time. It can also be a useful training resource for staff dealing with similar issues in future.
In summary
Crowdfunding can offer genuine opportunities for clients and support innovative projects, and it is not something law firms need to avoid altogether. But it does bring risks that need to be understood and managed properly.
The point is not that crowdfunding means you should walk away. It is that firms should avoid treating it as routine. Some crowdfunding matters will be perfectly manageable. Others will present such a complicated or opaque source of funds picture that the safest answer will be to step away.
As always, the important thing is to understand the client, map the funding structure, carry out proportionate due diligence, keep clear records, and be prepared to make a sensible judgment call. That is what a practical, risk-based approach looks like.
