When equity crowdfunding first emerged, it was an exciting new concept – providing early-stage companies with an alternative to the traditional funding routes of bank loans, angel investors and venture capital. Better yet, the platform has also allowed a larger number of individual investors to contribute en masse in a space previously dominated by large corporations and uber-wealthy financiers. This method of raising funds for business growth, for all its benefits, is not without its faults.
Today, private equity specialists Current Capital are putting traditional equity crowdfunding under the microscope, exploring what this thriving space looks like and the ways in which change can be embraced to facilitate better returns for everyone involved.
Left in the dark
As with many forms of private investment, contributing cash essentially boils down to taking an informed leap of faith. When it comes to traditional equity crowdfunding, the underlying issue is that you are investing in a concept, idea or business run by individuals who you haven’t met, and perhaps never will.
Lack of communication serves only to agitate this problem, as investors are often faced with an intelligence blackout after committing to a deal – left in the dark when it comes to key updates and information. Transparency should be an innate part of the equity crowdfunding process, giving investors peace of mind and providing a deeper understanding of how exactly their money is helping a company to grow.
An element of risk is part and parcel of any private investment, but the sheer quantity of available equity crowdfunding platforms has fostered a culture where sites are now forced to take on inherently risky deals. Variation in deal quality presents its own set of challenges – increasing the risk that comes with investment, and adding an element of uncertainty to all deals offered.
Due diligence should be undertaken by the host to ensure that all opportunities are fully researched and only legitimate, high-quality deals are presented to aspiring investors. Doing so would not only strengthen trust between sites and investors, but also positively impact on the industry’s reputation as a whole.
One of many benefits that come with equity crowdfunding is the potential for investors to enjoy generous tax relief – something actively encouraged by the UK Government through schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
Sites facilitating equity crowdfunding should check whether an investment opportunity has advance assurance before any funds are pledged, as well as auditing the company in question throughout the three-year qualifying timeframe. This way, they can ensure that investors receive all of the available benefits and prevent any potential tax issues cropping up for anyone in the future.
Investors expect transparent, honest forecasts and valuations, and clearly defined goals. In a crowdfunding culture where sites can list hundreds (or even thousands) of opportunities at once, it’s unsurprising that some companies create financial projections that are unrealistic and, as a result, dangerous for investors without a complete understanding of the opportunity in front of them.
Not only are misleading projections and valuations bad business practice, but the legal implications can be far-reaching. It should be the responsibility of the platform to conduct their own research and consult with financial experts, so that all parties can move forward with crystal-clear expectations – giving investors all the information they need to determine which deal is right for them.
Though traditional equity crowdfunding is not without its imperfections, there’s no doubt that this alternative approach to fundraising remains a vital tool for business owners looking to take their company to the next level. Constantly striving for transparency, due diligence and open communication channels should be integral to the equity crowdfunding process, in order to provide a bespoke service to investors and foster better relationships among all parties.
Kris Bolton is a partner at financing company Current Capital.