Money Observer


The following article appeared on MoneyObserver.com on February 19th, 2015:

What is crowdfunding? The term ‘crowdfunding’ might at first sound like a buzzword or fad to steer clear of, but proponents argue it can offer intriguing opportunities to catch a rising star.

It falls under the heading of alternative finance, which also includes peer-to-peer lending. The ‘funding’ part of the term refers to the money that startup businesses hope to receive to help them reach escape velocity.

The ‘crowd’ is you, along with hundreds or thousands of other investors, each of whom has a relatively small punt on a number of relatively risky investments.

Crowdfunding _Money _Observer

TAX RELIEF BENEFITS

Investing in unlisted startups is a highly risky business, more suitable for one corner of your portfolio than for the bulk. But there are several ways in which these risks can be mitigated, or at least made more palatable, including the prospect of tasty tax relief.

There are two specific schemes through which you can gain tax relief: The Seed Enterprise Investment Scheme (SEIS) is for companies at the very start of their lives and offers relief equal to 50 per cent of your investment, while the Enterprise Investment Scheme (EIS) is for firms that are rather better established.

In the case of equity crowdfunder Fireflock, all the companies available for investment are approved as SEISs. Syndicate Room takes a slightly more moderate stance, with most of its companies being approved as EISs.

Goncalo de Vasconcelos, founder and chief executive of Syndicate Room, says: ‘SEIS companies tend to be very risky, and that is why the government gives such good tax relief for brave investors. There is nothing wrong with that as long as the investor appreciates that it is very, very risky. As EIS covers far less risky companies but the tax relief is still incredibly generous, most private investors go for EIS rather than SEIS.’

Another way in which some crowdfunding platforms take some of the sting out of the risks involved is by vetting the firms they host, sometimes using ‘business angels’ - experienced, wealthy private investors who are prepared to put upwards of £100,000, and often their own business expertise, into carefully selected startups.

Syndicate Room places more emphasis on this than most, even going so far as to frame itself more as an angel investment platform than a crowdfunder. De Vasconcelos makes no secret of the fact his company is for sophisticated investors. Although the minimum investment is £1,000, he says the average investment works out at about £15,000.

EXIT POINTS

One drawback of buying shares in unlisted startups is that they can be nigh-on impossible to sell. There are three typical exit points: when the company is acquired, when it lists on a stock exchange or when it goes bankrupt.

Late last year Syndicate Room had its first success, in the form of Mill Residential Reit, which floated on the Alternative Investment Market. De Vasconcelos claims this is the first instance of a crowdfunded company reaching listing stage. As of 7 January, shares were trading at a 10.5 per cent premium compared to its share price at the crowdfunding stage.

But he says this is a special case because of the nature of the company - it buys properties and pays dividends from rental income - so the uplift is less than for a tech startup, for example.

According to de Vasconcelos, an IPO ‘results almost always in a huge return for early investors’, up to 10 or even 30 times their original investment. An acquisition would likely be quite profitable as well, but tends to be far more varied and unpredictable.

Michael Trudeau

You can link to the full article on Money Observer here.


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