We had a question on one of our blogs - how can this space be made to work?
By this space we mean specifically equity crowdfunding, not P2P lending and the original rewards based crowdfunding.
It's a difficult one to answer but it is clear that the current model as run by Crowdcube does not work. Why?
1. Lack of transparency on the platform
2. Lack of real time information due to the UK's accounting system
3. Lack of knowledge on the part of the crowd with early stage company growth, valuations etc
4. Lack of investor rights
5. Lack of secondary market
6. Lack of due diligence and FCA's hopelessness.
7. Profit incentive for platforms based entirely on completions.
8. Ease of access to EIS and SEIS
9. Ease of entrepreneurs and founders to hide behind Ltd status, use of pre packed deals etc
10. Lack of legal liability on the part of the platforms and the pitchers.
Is it possible to design a system that could correct all of these?
We think possibly. However it would be more along the lines of a National Investment Bank than a stand alone for profit platform. The emphasis would be the creation of successful, sustainable businesses, creating wealth and jobs, rather than the game show millionaire dream promoted currently. If investors can benefit, all well and good but the con peddled by the current platforms that anyone can be their own VC is just nonsense. A nonsense currently being fuelled by burning taxpayers money. If the EIS and SEIS sop was removed there seems little doubt that ECF would disappear as fast at it arrived.
The solution would be a longer term slow burn not some over night mirage. Investors would be protected but would not expect instant gratification. Shares would be tradable, taxpayers money better protected and businesses and their plans more intensively scrutinised. Entrepreneurs would not see this as easy access money.
ECF platform Syndicate Rooms aready addresses some of the issues you post, namely 3. and 4. Seedrs uses a nominee account structure which also address 4. The danger of NIB would be does the state know better than the crowd? Money flows to promising business ventures not the other way around.
ReplyDeleteAways, I really don't expect crowdcube to survive in its present form; it's aggressive advertising is a signal that it lacks the soberness that you would expect from early stage investing. I expect that once there is a fall out with the likes of CC and BnktotheFuture (or whatever the hell they are call) the better sites (in the UK Seedrs and SRs) willl be effected but will survive and add a need function funelling capital into SMEs. It seems that banks in this country prefer assest backed investments. I think your ideas are right, but I don't think anyone with any pwoer has the incentive to give a shit. Therefore necessay changes have to come from the ECF industry in oreder to survive a fall out.
As an aside there are plenty of "growth" companies on AIM. This market addresses many of your points, but there are plenty of basket cases on that market. However, its user (investors) are mature. The same needs to be the case with ECF. The investors on these site will learn their lesson. The ECF business will have to change. It's for sure.
ReplyDeleteSyndicateRoom is addressing point 3 with its 'Learn section' https://www.syndicateroom.com/learn. Has some articles that could help investors including one on how to choose an ECF platform.
ReplyDeleteIn syndicate rooms to take the same shares as the lead VC, on the same terms. Assuming they know what they are doing I think it address 4. Also Invesdor in Finland at least for the Atol Avion Oy offering is offering shares with exactly the same rights as the owners. I expect it the same for the other pitches.
DeleteI really think you are underestimating the ECF investors. A lot of people will get burnt but their going learn. The ECF is going to mature into different than it is now. People are going to vote with there feet and demand a large amount of equity to cover their risk. People aren't stupid. May be in the short term.
Syndicate Room certainly address some of the issues but if you have the profit motif in there it will always make it seem as though this is just window dressing to attract business.
ReplyDeleteSo what you're saying is, Rob, we need truly impartial education of the crowd. But to do that in any meaningful way takes money to create/curate the educational content and most importantly create awareness that it exists and get people to look at it. Who is going to do that for free?
ReplyDeleteOr maybe the solution is to include finance in the school curriculum. But, I'm being pessimistic here again, I can't see that happening either.
So surely the only option is for ECF platforms to be part of the solution by including glossaries, FAQs or SR's learning section. Surely that's better than nothing?
Im still chewing it all over. As i said it's not an easy one. Taking the profit motive out of the pitch success would help platforms to resist the temptation to exaggerate or just lie. See post on Jon Allen for information asymmetry. The crowd can never know what it needs to know. As taxpayers' money is already being wasted - £40m and counting so far - then yes there is money to throw at this.
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