InvestingZone made a splash recently by partnering up with FinnCap – a London brokerage for small-cap companies listed on the London Stock Exchange’s secondary Alternative Investment Market (AIM). Between them, the two companies will deliver an equity crowdfunding platform that caters exclusively to publicly listed companies.
We raved about the tie-up – which seemed particularly timely in light of the success recently enjoyed by the first publicly traded company ever to chance its arm at equity crowdfunding – Chapel Down. The English winemaking company closed its Seedrs campaign with a record £3,953,819 in the pot. The InvestingZone-FinnCap hybrid has the chance to replicate that kind of success over and over – with investors clamouring after chances to get a slice of a mainstream company, with the assurance of being able to subsequently trade their shareholdings on a public exchange.
But before investors consider the InvestingZone platform, or any platform like it, CEO Jean Miller is calling for a number of precautionary questions to be asked.
The InvestingZone CEO explained:
“Most people understand that early stage companies are risky, but few people realise that if you don’t check for some of the key terms and conditions which may be in the fine print of the shareholders’ agreement, you could end up investing in a successful company but still receive little or no return. It’s these type of unfair or even dubious contractual terms that we’re trying to draw everybody’s attention to, because it’s in nobody’s interests for investors to get a raw deal.”
Miller’s checklist begins – as indeed it should – with the issue of pricing. In assessing whether or not a valuation has been fairly applied, Miller highlights a number of key factors to consider: the market to be entered by the company, the management team, track record and profitability. Skin-in-the-game is also cited as a key consideration:
“You want to see them putting some of their own cash in as ‘risk capital’ at the same valuation as the crowd investors. This is an important test – Dyson put his own house on the line to raise capital when he was starting his vacuum business – that shows real conviction and ambition.”
Point number 2 of the guide focuses on preserving the value of your money. Investors need to be aware that startup companies typically go through multiple rounds of fundraising and investors must be cognizant of dilution risks. Miller advises checking for the presence of pre-emption rights before investing via an equity crowdfunder – and, in order to take advantage of such a condition, he also suggests setting aside some spare capital for investing at a later stage.
The next item ties directly into the previous point: make sure that the platform is transparent in its dealings. In order to take advantage of pre-emption rights and purchase shares as part of a future fundraise, investors need to know when and why that fundraise is taking place. A lack of clarity can result in the effective exploitation of early-stage investors.
Miller naturally also sought to emphasize the importance of voting rights:
"Many shares being offered don’t have voting rights or if held through nominee accounts won’t have voting rights other than collectively by the assigned nominee. That means that if a company hasn’t defined an exit strategy and the shares are illiquid, as many early stage shares are, then you will have no way of influencing how you will get your money out."
"Without a vote to force the company to push on for an Initial Public Offering (IPO) or sell up so people can realise their gains, you may never see the profits that you are due."
Not dissimilar to her point about transparency, Miller also calls for investors to ensure that they have the capacity to closely track their investments. It’s somewhat unrealistic to promise every shareholder in a crowdfunding round regular access to the management team of the company into which they have invested. An Angel investor would likely expect or demand this luxury. But given the multitude of individual investors that typically participate in crowdfunding raises, and the relatively small amounts that many of them will contribute; there are more sensible methods of keeping these investors in the loop.
For InvestingZone, the answer is to press the successful fundraisers to continually post bulletins on revenues, profits, summaries of achievements and business updates for their investors.
The final point on Miller’s checklist relates to tax reliefs – and making sure that prospective investors understand them. To that end, we’ve summarized the relevant considerations below:
Around 95% of companies that list on equity crowdfunding platforms are eligible for SEIS or EIS tax relief.
SEIS investments are subject to a 50% income tax credit – regardless of what your income tax rate is. In other words, when the tax year ends, investors may deduct 50% of their investment from their tax liability. There is a £150k per tax year cap on SEIS investments.
EIS investments offer a slightly lesser income tax relief of 30%. Up to £1m may be invested in an EIS scheme in any single tax year.
One fairly obvious point to keep in mind is that you cannot reclaim more tax than you owe.
Shares in unquoted companies are free from capital gains tax if you hold onto the shares for 3 years or more. Any gains realised in that time may be reinvested in another EIS or SEIS scheme. This process defers capital gains tax and means that your combined tax relief equates to up to 78% (50% income tax credit and 28% capital gains tax).
The final point relates to loss relief. Even if the company that’s been invested in goes bust, investors can qualify for loss relief – which is calculated at their marginal tax rate. As an investor in an EIS qualifying company that folds, you will still have 50% of the investment recovered through a tax credit, and may recoup up to a further 40% of the 50% that would otherwise be lost.
If InvestingZone can secure a strong pipeline of listed fundraisers, whilst staying true to the above-listed principles, the platform may evolve into a force to be reckoned with over the next few years.
