Is Crowdfunding overheating?

wpid-ScreenShot2014-07-23at10.17.57-2014-07-23-10-06.png

Firstly I am a big fan of crowd funding, I think it’s a great way for businesses to get access to early stage funding in a timely manner. Angel’s Den, Crowdcube and CircleUp are all great examples of active crowd funding platforms

Crowdcube closed a £1.2m funding round in 16 minutes from going live.

Is this a good thing I ask myself?

I thought I would write this so we can look back in 3-5 years and answer that question.

We have to remember that this is regulated activity and we have a duty of responsibility not just to disclaim risks, but provide as much information to the potential investor as possible to make their decision. During the process of listing Orbital Software, we spent a terrible 36 hours verifying every statement we made in the prospectus. This included qualifications of the directors, age, where they lived and inside leg measurement (ok they didn’t ask for this).

But even a sophisticated investor being given 16 minutes, to download and read a 39 page Articles of Association for Crowdcube Limited is a bit of a joke. I strongly believe that before any effective auction process goes live there should be a 7 day (or even 24 hour) access to information period.

141 investors signed up for this deal, therefore the average investment was £8,500. At this level the average investor was not really “high net worth” individuals in my book. I am sure they are all registered sophisticated investors, but I strongly believe there should be more control over this.

Interest rates and returns are at an all time low in the UK, so the search for returns is fuelling this demand. But selling high risk (and reward) financial products do need some level of control.

In this tweet stream, I specifically asked if the terms of the investment were the same as Balderton (the VC investing £3.8m of the £5m round). I have enough experience of VC’s to understand they typically (and rightly!) ask for preferential rights (liquidation preference, information rights, drag and tag etc) but what about the crowd?

wpid-ScreenShot2014-07-23at10.27.14-2014-07-23-10-06.png

The answer to me looked like we are all in the same boat – but the Articles tell a different story (and what about the shareholder agreement, service agreements and due diligence documentation). In most angel deals I have done this is made available to all shareholders, not just the VC’s. If I don’t read it that’s fine, but as part of an investment decision there should not be two sets of information rights.

Anyone who read the documentation would understand that the B shares (the ones available on the crowd funding platform) had different rights to the A Ordinary and A Preference shares offered. There are no voting rights or rights to attend or receive notice of any general meeting on any written resolution.

But in the 14 minutes that the offer was open, I am sure this will have been missed. Caveat Emptor!

Leave a Reply

Your email address will not be published. Required fields are marked *