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The AltFi Frontline: The Year in Equity Crowdfunding




By Ryan Weeks on 31st December 2014


With the New Year perched just around the corner, now feels like an appropriate time to look back over what has been a very busy 2014 for the equity crowdfunding space.

 

AltFi recently had the pleasure of playing mouthpiece to Crowdcube’s Luke Lang – who offered 10 equity crowdfunding-related predictions for the coming year. Many of those foretellings are based upon seeds that have been sewn over the past 12 months. To my mind, there are 5 key areas in which the equity crowdfunding sector has evolved during 2014:

 

  • Regulation
  • Government support
  • Diversity of product
  • Company types involved
  • Liquidity and profitability

 

First and foremost, 2014 will be remembered as the year in which the sector first benefited from a dedicated regulatory framework in the UK. The FCA’s regime came into force in March. As always seems to be the case when it comes to regulation, thoughts around the new set of rules have varied. The crowning jewel among the divisive stipulations was the “10% rule” – which dictated that retail investors may commit a maximum of 10% of their investible assets via equity crowdfunding opportunities.

 

But this, of course, is a far weightier allocation than is possible Stateside – where equity crowdfunding remains the preserve of the sophisticated investor. Title III of the JOBS Act remains entangled in a long and arduous holdup, with no clear end in sight. Indeed, if Luke Lang’s set of predictions is to be believed, retail participation in the US market may ultimately prove untenable.

 

While American equity crowdfunders are stuck in the mud – regulatory progress is occurring all over the world. A fresh set of regulations were ventured in Germany back in August. SeedUps believes that equity crowdfunding regulation will arrive in Canada in 2015. The SC in Malaysia sought public feedback on proposed equity crowdfunding regulations a few months ago. And the first ever equity crowdfunding campaign in New Zealand was also completed in the busy month of August, following the successful licensing of the Snowball Effect platform.

 

The hope will be that by the close of 2015 I shall have too many similar examples to list in a single article, and that equity crowdfunding will have taken hold on a truly global scale – but always under the watchful eye of a dedicated regulator. Specialized supervision of this kind will serve as a staple in safeguarding the growth of the industry going forward.

 

Bespoke regulation is probably the firmest showing of government support available – but it is not the only demonstration. Take the recent foray into the sector of Mr. Boris Johnson, Mayor of London, for instance. His baby, the London Co-Investment Fund, recently channeled £5m through the Crowdcube platform.

 

This is the first significant example of the government putting funds behind one of the UK’s equity crowdfunders. If all goes well, we might see more of this behaviour in the future – particularly in light of the government’s frequent monetary allocations to the peer-to-peer lending space via the British Business Bank. Crowdfunding platforms, after all, represent another method of funneling finance through to a different (usually earlier stage) branch of the nation’s small businesses.

 

Equity crowdfunders in the UK have strayed from their bread and butter in 2014. Crowdcube rolled out a series of mini-bond products – each of which has proved to be a roaring success with the platform’s investors. Seedrs has also been innovating. The platform came up with the first ever example of a convertible equity crowdfunding opportunity back in July. SyndicateRoom to all intents and purposes co-hosted the IPO of Mill Residential REIT – the UK’s first residential Real Estate Investment Trust. Each of these developments represents an attempt to strengthen market position via buffed up and broader product offerings. The combination of the three highlights the flexibility of the equity crowdfunding model.

 

We’ve also seen the first signs that equity crowdfunding may serve as a viable fundraising route for more established companies than those that are typically associated with the practice. Back in September, Seedrs played host to a £1m target fundraise from Chapel Down. The English winemakers became the first publicly listed company ever to venture down the equity crowdfunding path – and proved to be a big hit with investors. A record-breaking hit, in fact. At the close of the project in early October, Chapel Down had raised just shy of £4m, overfunding by some £3m.

 

No doubt taking its cue from the rampant success of Chapel Down, the crowdfunding platform InvestingZone soon partnered up with FinnCapp in order to deliver the first ever equity based platform designed specifically for listed companies. The cogs are yet to start turning on this one, but there is clearly demand within the online investment community for an equity slice of more sizable businesses.

 

It’s not simply the size of the company that’s pulling in investors – it’s the fact that those investors have an exit route at the ready should they wish to liquidate their stakes. This exit route, of course, comes in the form of whichever exchange the fundraising company is listed upon (in Chapel Down’s case, the ICAP Securities and Derivatives Exchange).

 

There have been a couple of other groundbreaking liquidity events in 2014, and each of these has presented backers with the opportunity to profit on their investments. 2014 thus becomes the year in which equity crowdfunding first proved that it could produce serious returns for investors. The most prominent example of this is the ReWalk Robotics IPO.

 

ReWalk has taken on the mantle of poster child for the equity crowdfunding industry. The company raised a total of $3.39m over two separate rounds (one in May 2013, the other in June 2014) on the Israeli platform OurCrowd. ReWalk produces mechanized exoskeletons that allow disabled men and women to once again walk. The business listed on the NASDAQ in October. Investors in the initial OurCrowd funding rounds saw the value of their original investment multiply 5.5x in just 18 months.

 

But the ReWalk listing was not the sole example of equity crowdfunders turning a profit over the past year. In November, a German platform by the name of Companisto fielded an offer from Lake of Constance Ventures GmbH to purchase all the shares issued in one of the platform’s earliest successful fundraises. The fundraise, funnily enough, had been for Companisto itself – not the first time we’ve seen a crowdfunder take advantage of its efficacy in order to raise funds for its own purposes. The offer was for $200,000 – and had it been accepted would have doubled the value of the investment of Companisto’s early-stage supporters.

 

Tellingly, however, it was not accepted. The decision was put to a vote, and the Companists (as Companisto affectionately terms its base of investors) said no. This seems to me an appropriate note upon which to end the year – for two reasons. Online equity investors are a shrewder bunch than many external observers give them credit for. Faced with an eye-popping 100% return about 2 years removed from investing, the Companists collectively decided that hanging onto their shares would ultimately be the more valuable course of action. Whether the wisdom of the crowd will be proven remains to be seen – but we are at least assured that equity crowdfunders seemingly do not jump indiscriminately at the offer of profit.

 

The reason that these investors are content to hold onto their shares is that they believe in the company – and the company, in this instance, is itself an equity crowdfunding platform. In other words, it demonstrates that a great deal of optimism surrounds Europe’s most successful equity crowdfunding outfits. The Angels and the VCs are circling, but the crowd suspects that it will field a host of similar calls down the line – probably involving bigger numbers. 

 

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