Thursday, 2 April 2015

Red Advertising Ltd - A study in how Crowdcube is ruining the UK ECF market.

Red Advertsing Ltd has raised over £1m in the last 3 years - most of this through Crowdcube.

The latest accounts for YE May 2014, have just been filed. They show a negative balance sheet with accumulated losses of £1.15m (£500,000 for 2013). Projections produced to sell their equity on Crowdcube, predicted profits for 2014.

Red Advertising have raised money on Crowdcube 3 or 4 times; we have lost count. They were lauded back in 2012 and 2013 as one of Crowdcube's great successes. Each time they have raised more money, questions have been asked.

At the last Crowdcube raise in 2014, the founder stated that this funding round was being backed by a venture capital company. When pressed, he stated that this VC was called Johnson Capital. He went on to state that Johnson Capital had carried out very thorough checks on their projections and that they were the only CC pitch that had a VC as a backer. So this investment, backed as it was by professionals, was far more secure than most. The problem is Johnson Capital run by Veera Johnson, is not a VC. Its a financial advisory company whose accounts are so small as to be almost invisible.

In 2013 at the second or maybe third CC Red Advertising raise, the founder was asked a very straight simple question by an existing shareholder. Will this be the last raise of capital? He received a very simple straight reply ''Absolutely the last call''.  After a brief explanation as to how things were looking up, the founder rounded off his answer with - ''This is the last call and the last chance to acquire shares in Red'. 8 months later Red Advertising was back on CC raising £400k using the VC story mentioned above.

When we asked them about the 2013 'last call' statement, we received the usual excuses but also a statement that this time it really was the last time as the company aimed to be sold by May 2015 - ie next month. We look forward to that. According to the latest accounts, the directors of Red are happy to call this business a going concern as they have, since May 2014 issued another £150k in shares. So yet another raise  - not on CC this time. Maybe CC thought this 4th or 5th round would be simply too much of a peetake.

During this whole sorry story, CC continued to take their commission - 5% on approximately £800k and continued to support what are now clearly shown to be unfacts.  Johnson Capital was never a VC and is certainly not a company of any substance. Financial projections were so wildly off target as to be worthless and simple answers to simple questions from existing shareholders have turned out to be untrue.

An interesting footnote to this case is that in 2014 when they were raising £400k on CC, Red were simultaneously raising the same £400,000 on Syndicate Room. When we pointed this out to Syndicate Room, they removed the Red pitch from their site immediately, siting the fact that Red had claimed to be EIS registered, when they were not. Asked why the Red Syndicate pitch had been removed, the founder of Red replied that he had made the decision.

As so often in the UK with ECF, the facts are very hard to find. Misdirections and in some cases plain untruths, keep cropping up time and time again. Instead of Dragons Den, Crowdcube should really be using the National Lottery as a comparable risk reward illustration.

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