Equity crowdfunding firms have welcomed steps to help small investors get a fairer deal after the UK’s financial watchdog last week unveiled plans to tackle ‘anti-competitive practices’ in the way investment banks manage stock market flotations.
The study of the Initial Public Offering market by the Financial Conduct Authority discovered that Investment banks are offering cut-price shares to their favourite customers before they hit the market.
Companies about to float on the stock market also routinely hire banks to line up big investors in advance – to ensure a good base of experienced, long-term backers.
The FCA said: ‘This is a conflict of interest if it’s not declared. You can’t do mates’ deals round the back. The City needs to be seen to be competitive, a good market, well-run and cost-effective. We can’t sit on our laurels or we’ll get squashed leaves.’
Responding to the FCA report, Tom Hinton, Head of Capital Markets at SyndicateRoom – an investor-led UK equity crowdfunding platform – said: ‘We welcome the FCA opening up the debate around the IPO process.
‘The public markets are part of the lifeblood of the UK economy and making the process fairer and more accessible will enable investors to make confident investment decisions.
‘The public is vital in improving liquidity for companies so providing a simple, clear and transparent way to access these offers, on the same terms as institutions is clearly beneficial.
‘The often closed world of institutional investing is being opened up by alternative finance and this will play a key role in energising retail investment and finding new ways to connect the public with investments.’
Having recently gained intermediary status with the London Stock Exchange, SyndicateRoom are already opening up the crowd access to public equity markets, providing equal opportunities for retail investors to participate in the same investments and on the same terms as the institutions, from high growth IPOs through to share placings of listed companies.
SyndicateRoom already has its first IPO lined up for members to invest in — HealthCare Royalty Trust, a healthcare investment vehicle that is looking to raise £200million.
While SyndicateRoom is the first crowdfunding platform to get intermediary status, several others are also attempting to extend the crowdfunding model to public markets.
Crowdcube, the UK's biggest crowdfunding platform, last year partnered with stockbroker Numis Securities to develop a crowdfunding IPO platform.
The FCA report collected information covering 220 flotations on the London stock market and further afield, worth £112.3billion.
IPO shares are typically undervalued when they first hit the market, the study found prices rose by an average 5 per cent in the first week – meaning the rewards for early investors could be high in a big public offering.
Dave Mutton, Chief Operating Officer at a rival equity crowdfunding platform PrimaryBid.com, said: ‘The UK is the leading the world in capital markets innovation and equity crowdfunding specifically. It is great to see the FCA continue to make positive steps here.
‘At PrimaryBid we are integrating technology into the capital raising process for quoted companies and thereby creating a fairer, more efficient and transparent system for both investors and Issuers.
‘This dovetails well with the FCA initiative and we look forward to be a part of an investment ecosystem that keeps the UK at the forefront of fintech.’
The PrimaryBid investment platform allows private investors to gain access to future share placings, fund raisings and IPOs of AIM-listed companies.
Free to join, members control the terms of their investment by deciding the company, price, and size of their bid for shares.
All investors' bids are aggregated and once a suitable threshold has been reached Primarybid approaches the AIM firm to see whether they would want to issue any fresh equity in a placing to raise cash.
There is no guarantee that the company will choose to proceed, and any placing activity takes place outside of market hours to avoid making any investor an insider throughout the process.
Primarybid has the backing of three small cap London broking firms, Shore Capital, FinnCap, and Arden, who have also invested in the firm.
Mr Mutton said: ‘Our investor-led approach to AIM investing has been a big success so far. With 4 deals already completed (most recently £500,000 for Ascent Resources) and with over £20m of demand currently on the platform on over 50 AIM companies it is clear endorsement from the investor community.’
The FCA launched its review into flotations last year and is recommending a shake-up of the system to make it more transparent, with paperwork published earlier so investors know more about what they are buying.
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