An introduction to equity crowdfunding

Brought to you by Deloitte

The roots of equity crowdfunding date back to 2011, during the height of the financial crisis. It was initially designed and used as a mechanism for early stage businesses to access equity finance, and was a necessity, at the time, due to the reluctance from high-street banks to lend money to SMEs.

In its short life span, it has already become the most popular source of equity finance in the UK. In 2017 the most active equity investors were correspondingly Seedrs (144 deals) and Crowdcube (133 deals). Additionally, the total amount invested in equity crowdfunding platforms in the UK in 2017 was £300 million, according to a Beauhurst report published in 2017.

This makes the funding type the second largest source of equity finance other than private equity and VCs.

What is equity crowdfunding?

In simple terms equity crowdfunding is a way for individuals to invest in early stage businesses via an online platform.  They receive shares in return for their investments into businesses.

Crowdfunding platforms advertise equity crowdfunding opportunities, which showcase campaign pages and typically consist of an investor video, financials and a summarised business plan.

One of the reasons it has become so popular is linked to the generous SEIS and EIS tax relief schemes, which most campaigns on equity crowdfunding platforms qualify for. Read more about the schemes here.

It is becoming increasingly common for institutional investors to allow the crowd to invest alongside them. A notable example of this is Monzo Bank, which kept back a £1 million allocation of their million Series A round to Crowdcube investors. The round was predominantly made up by Passion Capital, who invested £5 million.

Under current EU legislation, the maximum amount which can be raised through equity crowdfunding is €5 million.

Who are the main platforms?

The main equity crowdfunding platforms in the UK are Crowdcube, Seedrs, Syndicate Room and Venture Founders.

Each have their own individual characteristics including the way they structure deals, alongside the fees they charge. If you are considering raising money through equity crowdfunding you should talk to a minimum of at least two different platforms.

This will allow you to potentially negotiate lower fees, as well as understanding what level of support (i.e. PR activity, SEIS/EIS registration) can be provided.

One of the main things you will need to consider is whether you will want to use a platform which allows crowdfunding investors to hold shares directly or through a nominee structure. Both structures have pros and cons so this is a decision which should be given some thought.

It’s about more than the money

It’s often said that equity crowdfunding is about more than the money. It can be a great way to generate a PR buzz, create brand advocates and ultimately generate more sales.

It is for this reason that consumer businesses typically fare well on platforms, due to them being concepts which are easy to understand for everyday investors, and be a an effective way to galvanise an existing customer base to create a long term bond between them and your company.

This investor base can effectively be tapped into by communicating the investment opportunity to followers through social media channels and email communication.

Our experience with equity crowdfunding

A number of our clients have successfully raised funds on equity crowdfunding platforms, including Tribe (a high growth sports nutrition company), who raised £1.7 million on Crowdcube last year. Click here to read our case study.

You can download the PDF version of this article here.

Propel by Deloitte works with a number of different equity crowdfunding platforms, and through the delivery of one of our investment readiness sessions we can signpost you to the platform most suitable to your individual needs. Contact us to talk to one of our experts.