Tuesday, 9 May 2017

Equity Crowdfunding Secondary markets.



Both Seedrs and Crowdcube claim to have set up workable secondary markets. We have an opinion, for once!


A workable secondary market is the holy grail for equity crowdfunding. Being able to release investors from their too often worthless paper share certs and give them a return for their risk, would make the whole game work.

However the key word here is workable. Vanity projects set up by the two retail facing ECF platforms, Seedrs and Crowdcube, wont be. 

Seedrs - 

Their model is to set the share price and have a week long 'sale' once a month. A similar idea to that operated by Asset Match, who sold shares for Brewdog last year. Only existing Seedrs investors can partake. 

Lynn says the reason for them setting the price is to prevent wild swings  - either up or down. Apparently EY, who we can all remember as the accountants involved with Bernie Made-OffWith- MaMoney, have stated that Seedrs use a verifiable system to value these shares. It's the same system that tries to make us believe that Seedrs investors are in fact seeing considerable ROI; despite the facts. What EY know about starts ups should be written on their charge sheet.

In a normal market, buyers set the price via demand. So investors know that even if the company doesnt turn out as predicted, they may be able to sell their shares and recoup some of their money even at a loss. This is not the Seedrs vision.

Time will tell, but Lynn's insistence that there will be no down rounds suggests he has his head in the clouds. Valuations are, I think we can all agree, too high on both platforms, so putting them higher for the secondary market is not going to work. Without buyers, Seedrs have no market.

Crowdcube have taken a different route. They claim to have created a secondary market in their PR. But on checking, they havent.

Two Crowdcube companies recently offered shareholders a way to sell their shares - Celixir and Mettr Technologies. Both were exceptional cases in that they had received large inward investments from overseas and these new investors didnt want to manage a whole raft of mini SH's at the AGM. Celixir (Cell Therapy) had claimed on its Crowdcube pitch  - 

Cell Therapy is scheduled to complete a public listing on Jan 14th 2015 on the Euromarket GXG exchange at an initial valuation of £100M (~£50 per share). This Crowdcube funding is the final private placement prior to listing with a pre-IPO discount of over 25% at a £64M valuation (£37.00 per share). 

Needless to say, this never took place. 

Its certainly true that shareholders in both companies have seen very good returns. But to understand if this is a trend, as Darren Westlake claims in a PR piece here, or a couple of exceptions, you need to know all the facts. It's similar to claiming that the recent Brewdog deal, where shareholders could sell around £500 worth of shares only, actually gave a ROI of 2800%; as the Brewdog Capman claimed. Of course it didnt - to get a return you need to be able to sell your holding not a tiny percentage of it. Brewdog shareholders cannot sell their remaining shares as there is no market. Darren does claim precisely this but who is surprised anymore?

Real secondary markets need to trade at fair prices set by buyers and based on known facts. Neither Crowdcube nor Seedrs seem able to produce either. Buyers will not be fooled and there are no perks this time around, so why would they bother? There will be the occasional exception to prove the rule.

There is of course the whole issue with S/EIS and the 3 year rule. Selling your shares before 3 years is up will mean payments to HMRC and the loss of the CGT avoidance - although the latter may just be wishful thinking. It could be a bit of minefield especially with the Crowdcube single investor model.

Someone somewhere needs to come up with a better model. We are working on it. 




15 comments:

  1. Seedrs has obviously won the PR race for the first secondary market, congrats for this masterpiece. To by fair, both companies speak about a "beta" market place. There are disadvantages but is will be better than in the past without such a market. Time will tell.

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    1. Not convinced that something (no matter how bad) is better than nothing here. Simply I dont think it will be used. You cant sell shares if no one wants to buy them and most (95% of Crowdcube's) funded companies fall way short of their projections(the ones used to sell the original shares and value the company) so why would people buy these at a higher price? Easier to just jump off a cliff?

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  2. There are a few companies who I believe would sell and would also make a positive return for sellers due to multiple raises and increased valuations/Seedrs' valuation model - Seedrs themselves and Eebria are two that spring to mind.

    I'm sure there will also be sellers attempting to offload more questionable positions - The only people to benefit in this scenario are Seedrs (7.5% fees). Hopefully anyone looking to buy this way will have their cynical hat on when it comes to due-diligence.

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  3. I welcome Seedrs secondary market. It is of course very limited and they have had to take into account the impact on the companies who fundraise through them. Few will use it initially, as people wont want to give up their EIS benefits. But it does at least give people an opportunity to sell their shares if they really want to. Incidentally, i have 4 investments through Seedrs. In terms of valuations one of them is set by the open market as it is already tradeable (Chapel Down). Of the other three, two are at exactly what I paid for them and the other is up 10%.

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    1. Im confused. How do you know that two are at what you paid for them and another is up 10%? To be at these levels you need to be able to sell the shares - so who are your buyers? Unless of course you believe the Seedrs PR. The whole point about these so called secondary markets is that they dont in reality exist - because there are no buyers for these shares at the ridiculously inflated prices. The Seedrs valuation gimmick is just that - a gimmick.

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    2. Some people offer shares for sale at a price in the Seedrs comments sections, if they are rapidly sold, you can geuss that that is a sort of market price.

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    3. Does anyone buy them? Must be sort of bonkers!

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  4. Hi Rob, i mentioned the 'valuations' because people might have thought that under Seedrs fair valuation policy the valuations may have gone up in an extreme way. This doesnt appear to be the case. I expect most will be valued at the level of the last raise. Not too extreme.

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  5. Whether they are accurate is another matter!

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  6. Rob

    An interesting article and you raise some important issues. But please ensure you're reporting on accurate facts. I suggest you read our valuation policy in full.

    There are plenty of companies that have been marked down to zero. Some remain the same. Some have gone up. So there will be shares for sale on our market at less than what they were originally paid for.

    Launching the market with the price set at the valuation policy price is for our beta launch. It's not how we envisage this working long term. It is, in our view, the responsible way to launch a complex product which affects buyers, sellers and the companies themselves.

    Thomas Davies
    Chief Investment Officer
    Seedrs Limited

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  7. Not sure I understand your term zero? Do you mean you have lots of companies that have funded via Seedrs that are now worthless?? Help!!!!!

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    1. Isn't that the nature of the beast, though?

      Some startups do indeed fail - which from my interpretation of the Seeders point would result in a mark down to zero (or 'worthless' as you put it!!).

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    2. Our argument is that by counting failed businesses as zero ie no negative value, this gives the whole picture a scewed outcome. What they are doing is inventing upward values (not proven) and ignoring the losses incurred whwne a business goes bust. If you invest £500k in a business on Seedrs and it goes under then the value to you as a investor is not zero its negative to the value you invested. And whats more this is real negative value not invented. Lots fail - that the nature of start ups but you cant give the failure a zero value - that's plain stupid and allows the platforms to make up their overall success.

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    3. Hi Rob

      I think you need to look into how IRR works generally and how our valuation policy (which forms the basis of each Seedrs investors IRR calculation) fits alongside this.

      The fair market value that we place on a share is the value of the share at any point in time. That can't be a negative number (this would mean you owe money).

      However the fair market value has nothing to do with the loss you have incurred. This comes through the IRR calculation which essentially looks at the price the shares are worth today and what you paid for them. If you paid £10 per share, and we have marked them down to £0 (because for example the company has wound up), then you would have a negative IRR with respect to that investment.

      Incidentally, we also show investors their tax adjusted IRR which factors in the tax relief received through income tax relief and loss relief.

      Hope that helps

      Tom

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  8. With the greatest respect Tom - that is just PR spin - not even very good spin. Seedrs has a plan and if the investors are so stupid not to see what it is then I wish you best of luck with it. Im afraid it doesnt make it right. To claim as you do that overall investors are X% up when they cant even sell their shares and you dont account for lost businesses with anything apart from a zero value is ridiculous. EY or no EY, it is not an accurate way to look at these investments. You simply cant have any IRR if there is no way to realise any R. Your companies'shares have no market, no value at any given time. They are just bits of paper until they go bust when they have a negative value to the SH. Alternatively the company might be bought or IPO but most of that upside is still just a dream. People didnt invent IRR for dreams Tom.

    Hope that helps. By the way not much point in being Unknown and signing off as Tom - Seedrs Head of Misinvestment.

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