Crowdfunding – shark-infested waters?

I wrote a couple of months ago about my own first tentative steps into crowdfunded investments.

There is some real momentum behind this relatively new alternative finance phenomenon, technology and awareness giving entrepreneurs access to a large pool of potential individual investors.

Crowdcube is the largest platform, providing a bridge between the entrepreneur and investors. As of today, it has 283k investors on its books, and £165m has been pumped into 406 successful fund raises. It may be an unfair comparison, but Crowdcube could be considered the Tescos of equity crowdfunding, piling the deals high and selling them off cheap.

But at what price to investors…?

The Solar Cloth Company used the Crowdcube platform to raise £967k from 400 individual investors just 17 months ago. The Directors projected the business would be valued at £100m in just 3 years after the funds had been raised.

The Times has reported today that the Solar Cloth Company has just gone into administration, blaming a downturn in the solar power industry, and cuts in government subsidies.

Another significant failure with Crowdcube’s name all over the fund raising was Rebus. A claims management company, it raised £816k from 100 investors just months before it collapsed in February 2016. Investors through Crowdcube were not aware that Rebus had previously engaged a restructuring expert to advise them how to plug a cash flow chasm.

Crowdcube – and other equity crowdfunding (“ECF”) platforms – must start performing proper due diligence before listing investment opportunities. Otherwise the FCA should step in to ensure there is sufficient investor protection. The current “hurdle” – someone signing up to an ECF platform has to self-certify that they are either already a sophisticated investor, or a high net worth individual – is about as low as a limbo-dancing snake in a BHS store.

Crowdcube should also be much more transparent on their site about previous fund raises. I’d like to see a detailed summary of all businesses that have successfully completed ECF rounds, showing the timing, amount raised, key commercial milestones relative to business plan projections, any subsequent capital raising efforts….and all very clearly linkable from the Crowdcube home page.

And its failures should be even more transparent, giving investors a much louder warning that their hard-earned cash is at significant risk.

ECF is growing fast, and has the potential to be an even greater weapon in the fund raising armoury for start-up and early stage businesses. It would be a real shame if the platforms blew that opportunity.

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