Offering up some words of wisdom when it comes to equity crowdfunding, Crowdcube shared strategic insight in a post titled 7 Points Investors Should Consider. The platform provided advice for a wide range of equity topics including how to handle risk and skeptical investors.
Investing on crowdfunding sites is increasing in popularity. Crowdcube has seen as much investment in the first half of 2014 as the preceding 12 months.
If you are thinking about investing on a crowdfunding platofrms, here are a few items to consider from the team at Crowdcube:
- With Risk, There’s Reward: Investing in early stage businesses has the potential for great returns. Innovation charity, NESTA, identified business angels as having an overall return of 2.2 times the capital invested. But this situation does place your capital at risk. This means you need to do your own due diligence and only invest what you can afford to lose. (The crowdfunding platform notes you may want to follow #InvestAware on Twitter).
- Generous Tax Breaks: There are some incredibly generous tax breaks available to investors in the UK. The main two being Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). With EIS, people can invest up to £1,000,000 in any tax year and receive 30% tax relief. However, they are locked in for a minimum of three years. SEIS is for earlier stage – ‘seed’ – businesses, and allows investors, including directors, to receive initial tax relief of 50% on investments up to £100,000 and Capital Gains Tax (CGT) exemption for any gains on the SEIS shares. The relief is higher due to the associated risk of start-ups. The relief means that if you pay tax at 45% and make an investment of £10,000 that fails completely, you only lose £2,750.
- Multiple Investment Products: As well as growing, the more advanced crowdfunding sites are beginning to offer different ways of investing. For example, it’s now possible on some platforms to lend money to more established brands as well as buy an equity stake in start-ups and early stage businesses.
- Choose the Right Platform for You: Some platforms are open to everyone – from investment novices to Venture Capitalists. Others are restricted by the Financial Conduct Authority (FCA). If you’re new to investing or don’t have net assets worth more than £100,000, look at sites that allow “Restricted Investors” (sometimes called “Everyday Investors”) or “Advised Investors.” Restricted Investors are people who agree not to invest more than 10% of their investible assets in crowdfunding, whilst Advised Investors will receive advice about their investment from someone like an IFA. Other investor categories to look out for are ‘High Net Worth’ and ‘Self-Certified Professional Investor’. Generally speaking, the former earn more than £100,000 a year or have net assets of more than £250,000 whilst the latter are people who have invested in more than one unlisted company or have been a member of a business angel syndicate. Here’s something to watch out for. If you classify yourself as an ‘Elective Professional’ you’re agreeing to waive two key investor protections – the Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS).
Investor Fees: if you make a profit from your investments some platform will take a slice of your money despite not taking any of the risks. It’s worth checking which platform charge investors and those that don’t. A commonly used phrase is a “carry.”
- Due Diligence: Whilst reputable crowdfunding platforms will carry out due diligence on the investment opportunities they present, it’s vital that you do your own. So ask questions and join in conversations – see what the crowd thinks. Crowdfunding has opened up investment to a whole new group of people so make the most of their skills and insight.
- Dilution and Shareholder Rights: Dilution occurs when a company issues more shares and affects every existing shareholder who does not buy any of the new shares being issued. As a result an existing shareholder still holds the same number of shares, which may have increased in value, but their proportionate shareholding of the company is reduced, or ‘diluted’. In relation to dilution, you may see the phrase ‘pre-emption rights’. In essence, this means that if you have pre-emption rights and the business wants to sell more equity they usually have to give you the option to buy some first and stop your share being diluted. The key point here is that you have to invest more money to stop dilution occurring. It’s you parting with more money that stops dilution, not pre-emption rights per se. Under English law allotting further shares in the company for the improper purpose of diluting a minority shareholder’s shareholding is an obvious example of unfair prejudice. This means that a claim can be brought under the Companies Act requiring the purchase of shares at an independently assessed value.