Equity Crowdfunding… go on then, how does it work Mr?
…First published by Bird Lovegod in the Yorkshire Post, readable here on Pressreader.
For the next few weeks I’m going to put on rubber gloves and dissect the inner workings of various fintech sectors and business models. So gather round whilst we have a probe into the first of the series, the ‘How does it work’ of Equity Crowdfunding.
Equity crowdfunding is the process whereby companies, early stage startups usually, sell shares, their equity, via an online platform, to a crowd of people who want to own shares in the company.
In the UK there’s two main players in the equity crowdfunding space, Seedrs, and Crowdcube. Right now I’m focussing on Seedrs. Currently there’s 22 companies you could invest as little as £10 in, ranging from a massage on demand service, a Peer2Peer payday loan company, a stand-up comedy app, an amphibious electric hybrid aircraft company, and a coffee tasting club. It’s a smorgasbord of commercial creativity and inventiveness, if you ever think business is a bit boring have a look at some of the weird and wonderful companies there. Here’s how it works; As a company you submit a campaign and create an investment deck, and Seedrs do their due diligence to make sure you’re truthful and accurate. You then have a private launch, which if it’s reasonably successful, around 20% or more of your equity selling to your exiting fan base, means you can go live on the public platform. This exposes your offering to the hundreds of thousands of registered investors, for a maximum of 60 days.
Assuming you’re successful in hitting or exceeding your target, and seemingly most are, as a company you pay Seedrs 6.0% of the amount raised, plus a 0.5% processing fee, plus a £2500 admin fee. This is a fair whack, an average raise on Seedrs is around £500,000, giving them a revenue of around £30,000 each time. They earn it though. Seedrs has a nominee structure, which means they are a middleperson between the company and the crowd of shareholders. This can be quite significant. Managing the crowd of investors can become a burdensome but vital job for the company, so having a Nominee in the middle, that also handles all the legals and paperwork, is potentially a wise choice, the paperwork on fundraises can be hugely expensive and tiresome at the best of times. From an investors point of view, Seedrs also take a 7.5% slice of any profit you make from your investment, so they earn revenue from both ends, providing both ends are successful. It’s a clever and fair way of having the interests of both investors and companies covered. There’s always been downsides of investing in companies like this, the probability of them going bust is high. The biggest problem used to be what’s called ‘lack of liquidity’ of the shares held. Once you own them, there’s no secondary market to sell them on. You can’t liquidate them into cash. This means investors used to run the risk of owning shares that cannot be resold. The company could tick along quite nicely for years, decades even, without the investors seeing any return, other than perhaps a tiny dividend. It used to be there was only two ways for investors to get a return in the event of an ‘exit’, one being an acquisition of the company by another company, also called a trade sale, or by an IPO, an initial pubic offering, a listing on a stock exchange. Trade sales are rare, less than 1%, and IPOs are rarer than that.
Seedrs have recently addressed this long standing problem of illiquidity by successfully creating a secondary market on their own site, and it looks interesting. Unfortunately I can’t provide a vast amount of information because the secondary market, currently in ‘Beta’, i.e it’s still being tested, only opens for one week every month, and the next round starts on September 4th. However, it’s been running for several months now, a sort of mini stock exchange for Seedrs funded companies. Apparently, some successful investors have seen profits of 7 or 10 times. Other shares have still been non liquid, just for the simple reason that no one wants to buy them at the price that Seedrs sets. (Unlike a full stock exchange Seers themselves determine the valuation of the companies on the secondary market.) It’s early days but it’s a big step in the right direction and has significant implications for the valuation of startups and those who invest in them. Watch this space for more updates. Bird