The Financial Ombudsman Service’s ombudsmen make many adjudications that result in firms losing their case and being ordered to pay compensation to customers.

However, few ombudsman decisions can be said to be a ‘landmark’ ruling for a particular business sector, but that description fits perfectly for a recent adjudication which went against a crowdfunding platform.

The client in this case was a retail investor who invested £18,000 in a new Chinese takeaway business. When he made his investment, the platform’s business pitch spoke of the takeaway business having opened a third and fourth retail outlet, and also said that they were seeking to expand further. The client says that this led him to conclude that anything he invested would be used to fund the opening of additional outlets. When this didn’t occur, the client initially asked the takeaway business to buy back his shares, but when it refused to do so, he submitted a complaint saying that the business pitch was misleading. He added that he would never have made the investment had he been aware that the takeaway business would not be opening new sites.

The complaint was initially rejected by an FOS adjudicator, but the investor then appealed to an ombudsman.

In making his decision to uphold the complaint, ombudsman Ben Waites said that the crowdfunding platform was aware that the takeaway’s expansion plans were unsubstantiated. He added that the platform failed to communicate these concerns to potential investors, and that the takeaway’s pitch failed to meet the Financial Conduct Authority’s “clear, fair and not misleading” requirement.

Mr Waites’ judgement also says:

“In order to safeguard investors such as Mr S, [name of platform] ought to have asked what Company A meant by further expansion and should have checked whether this was plausible.

“[name of platform] could have asked for evidence of agreements in principle or anything to demonstrate Company A intended to open new stores. In the absence of this information, I don’t think it can be argued that [name of platform] was acting in Mr S’ best interests, as it failed to ascertain how Company A would expand and how plausible these plans were.

“[name of platform] knew Company A’s plans for using the funds were at an early stage and were not substantiated with sufficient documentary evidence for it to conclude how plausible these plans were. Yet [name of platform] didn’t make Mr S aware of this anywhere in the pitch.”

The platform must now pay £13,000 in compensation, calculated as the amount of the initial investment less the tax relief claimed. The platform continues to dispute the FOS ruling, even though, now an ombudsman has looked at the matter, there are no routes of appeal remaining. The platform believes that the takeaway business changed its business plan after the investment money had been collected from the likes of this complainant, and that it should not be held responsible for this change of plan. It also suggests that it would be inappropriate to force companies who are raising funds to execute one particular business strategy.

The takeaway business eventually went into liquidation.

The concern now for the crowdfunding sector is whether this case will herald a deluge of similar complaints.

Rob Murray Brown, founder of crowdfunding consultancy and investor network ECF Buzz, commented:

“This ruling is a landmark case. Finally, we have seen some action from the ombudsman. We have been calling for this for years.”

Theresa Brown, co-founder of trade body the UK Crowdfunding Association, said that this case has “implications for platforms to raise the bar of their due diligence processes.”

The ruling very much implies that platforms have a duty to rigorously verify information provided by companies in their business plans, and to communicate their findings to investors.