As an investor, you have a growing number of equity crowdfunding platforms to choose from.
However, with this increase in choice comes a greater need to do your due diligence before you invest. So, what should you look for in an equity crowdfunding platform?
Check the platform’s credentials
Equity or investment-based crowdfunding is regulated by the Financial Conduct Authority (FCA). So, one of the first things you should do as a potential investor is to check that the platform has been approved by the FCA.
Look for wording on the site mentioning the FCA; typically this will be in the footer and will state that the platform is authorised and regulated by the Financial Conduct Authority and give a number. Make a note of this number, go to the FCA website and enter it in the ‘search by firm reference number’ field. This should tell you whether the company is authorised or not. If it is not authorised then walk away immediately.
Some platforms are members of the UK Crowdfunding Association (UKCFA) and have signed up to a code of practice. The code and a list of members can be found on the UKFCA website.
The UK Business Angels Association (UKBAA) also counts equity crowdfunding sites amongst its members and publishes a member directory.
Understand the investment terms
Make sure that you understand the investment terms that the platform offers. These includes aspects such as valuation, pre-emption rights, drag-along and tag-along and nominee versus direct shareholding.
Our ‘Legals’ section will go into investment terms in more detail.
Decide how much you want to invest
Some equity crowdfunding platforms let you invest as little as £10 whilst others start at £1,000 or more.
The FCA stipulates that under its regulations, “firms are only allowed to promote illiquid securities to particular types of experienced or sophisticated investors, or ordinary investors who confirm that they will not invest more than 10% of their net investable assets in investments sold via investment-based crowdfunding platforms.”
Remember that your capital is at risk and you should not invest more than you can afford to lose.
Do you hold the shares or does a nominee?
Some platforms are set up to allow their investors to become direct shareholders in the company they invest in while others operate what is referred to as a nominee structure.
Under a nominee structure, the shares purchased by investors are held by a nominee who is listed on the company’s cap table. By holding the legal title to the shares, the nominee is able to act on behalf of investors though the economic rights remain with the investors.
Find out about the platform’s fee structure
Fees are generally not charged to the investors but to the company on successful completion of the funding round.
These fees tend to be broken down into three categories:
Success fees: these are charged for successfully raising the funds.
Legal fees: some platforms charge the companies for reviewing and amending the legal documents for the fundraising.
Additionally, platforms that operate a nominee structure tend to charge a Carry (a cut of the earnings if the investors make a profit when the company they have invested in exits) which may be justified by covering the costs associated with managing the nominee structure. One platform that does charge a carry currently charges 7.5% of any profit made by the investor.
Is it ‘All or nothing’ or ‘take what you get’?
Equity crowdfunding platforms operate on the the ’all or nothing model’. This means that if the company raising investment does not get the full amount, it is seeking by the fundraising deadline, then investors get their funds back and the company does not get any money.
The ‘take what you get’ or ‘flexible funding’ model is used by some reward-based crowdfunding platform such as Indiegogo.
Check whether overfunding is permitted
Some equity crowdfunding platforms allow overfunding. If a company reaches its target amount before the deadline and there is still demand from investors then it may be permitted to continue to accept investment. This is known as ‘overfunding’.
A company does not have to agree to overfunding but if it chooses to do so then it must release additional equity corresponding to the amount of the overfund.
Doing your due diligence on the available equity crowdfunding platforms is definitely recommended.
Then, you’ll be armed with the information to enable you to decide which one is best for you. Only you can decide that.