Equity crowdfunding – which enables armchair investors to buy shares in private companies online – has been growing rapidly over the past two years.
Sites like Crowdcube and Seedrs allow people like you and me to look at business plans online and decide which one we want to invest in. Like the fire-breathers of Dragons' Den, we can solemnly declare to our computer screen, 'And for that reason, I'm out.' Or of course, decide that the business is worth a £50 punt (minimum contributions actually start at £10).
Cutting out banks and institutional investors, equity crowdfunding puts ordinary people in contact with ambitious businesses – both start-ups and established companies – that need funding to grow. But there are two rival models for doing it, and the debate between them has become increasingly heated.
One, used by Crowdcube, allows each investor to buy a tiny stake in the company directly. The shares you buy have your name on them. This means that the company raising money might end up having hundreds, even thousands, of very small shareholders. Crowdcube itself makes no charge to investors, only to the businesses raising money.
The other model, favoured by Seedrs, involves a 'nominee' system whereby the crowdfunding platform buys shares on behalf of the people who want to invest. In this case, the legal owner of the shares is Seedrs, but there are hundreds or even thousands of beneficial owners. Seedrs does charge investors to act as their nominee.
While there are pros and cons of both methods, we thought that the co-founders of Crowdcube and Seedrs themselves were best placed to make the case for each of their business models. So we asked Luke Lang of Crowdcube and Jeff Lynn of Seedrs to present their arguments and leave you to decide.
Please remember that making equity investments in small, unquoted companies is highly risky and you may lose some or all of your money.
The case for direct ownership
Luke Lang, Crowdcube
When it comes to investing it’s the numbers that matter, and Crowdcube is peerless in terms of its success to date. Since February 2011, 45,000 savvy investors have registered, helping raise more than £12 million for over 60 UK businesses – more than any other equity crowdfunding platform in the world.
The bedrock of Crowdcube’s unrivalled success is its model, which gives investors direct ownership in the business without the middleman. Business angels have successfully structured investments for decades and they know what works; we see no reason to change this. Therefore, we take the virtues of angel investing, with Crowdcube investors able to receive the voting and pre-emption rights that they expect, but we make the whole process more accessible and rewarding.
No other platform has managed to come close to matching the number of businesses funded, the amounts invested or number of investors. The average investment is a healthy £2,700, with £5,000 the fifth most common amount. Investments over £100,000 are not uncommon and the largest single investment is a notable £250,000.
Having a direct shareholding gives people a clear sense of ownership and control, which is a fundamental part of the decision for savvy investors. An independent survey of Crowdcube investors by the University of Bath in March 2013 backs this up, with three times as many preferring direct ownership than investing via a third party or nominee.
What’s more, there are no investment fees, either upfront or when the company exits – it’s our view that it is an investor’s money, it’s their risk and their reward.
Numerous businesses that have successfully funded via Crowdcube have gone on to raise further finance, either on Crowdcube or through traditional business angel networks, dispelling the myth that having a large number of investors will put off future investors.
In fact, such impressive levels of investment attracts more accomplished entrepreneurs seeking finance, which in turn results in more and larger investments. This virtuous circle makes Crowdcube the most active and exciting equity investment platform in Europe.
Benefits of the nominee system
Jeff Lynn, Seedrs
Seedrs is a platform for discovering and investing in great start-ups. We let people invest as much or as little as they like in start-ups they choose. And we provide a simple, seamless way for new businesses to raise equity capital from friends, family and the crowds.
At the heart of Seedrs is the belief that investing isn’t just about finding deals and transferring money. Instead, it’s about being able to get involved with the company as it grows and earn returns if it’s successful. That’s why we do three things that our competitors do not.
First, we ensure that all investors receive voting shares. Crowdcube reserves voting shares for only the very largest investors, leaving everyone else with non-voting “B” shares and no say in how the business is run.
We also guarantee that investors receive regular information about their investments and the opportunity to engage with their companies. We do this by requiring all companies to provide trading updates to their investors at least every quarter, and by hosting a portal through which investors can track and get involved with their investments at any time. By contrast, Crowdcube does not require any engagement between the company and its investors.
Finally, we protect investors’ rights by entering into a subscription agreement, as the investors’ nominee, with each investee company. Professional investors always require agreements like this when they make an investment, because they know that contractual protections are the only way to prevent abuse and ensure that they earn returns if the company is successful. We think our investors deserve the same, whereas Crowdcube provides no contractual protections to its investors.
Seedrs has funded 37 start-ups since our launch 15 months ago, and we are growing quickly. We are authorised and regulated by the Financial Conduct Authority, having been the first equity crowdfunding platform in the world to receive regulatory approval.
If you would like to discover and invest in great start-ups, we hope you will consider equity crowdfunding done properly and visit us.
Do you have any questions for Luke and Jeff, or any points to make? Please feel free to comment below.