Equity Crowdfunding: Not All Platforms Are Born Equal

Goncalo | SyndicateRoom , while I agree with your points in general do I detect some critical undertones directed at your competitors namely Crowdcube (principle 2 and the linked article in principle 3)?

Goncalo | SyndicateRoom

If we take the second of your 3 'core principles of equity crowdfunding', in your article you state, "2. Fairness: And yet, having access to the same deals as the professionals is not enough. The crowd must have fair This means that it doesn’t matter whether you invest £1,000 as a private investor or £1m as an institutional investor, everybody should make or lose the same amount of money on a £1-per-£1-invested basis, equally sharing the risk and reward. The class of shares and price per share must be the same for all investors. When a platform offers a lower class of shares to the crowd, ask yourself why you should accept a worse deal than anyone else. Be wary of any platforms that offer lower share classes to the crowd whilst offering better share classes to larger investors" (Source: http://www.forbes.com).

This appears to a reiteration, in part, of previous comments which have directly or indirectly sought to provide a contrast with platforms offering 'B' shares, which lack voting or pre-emption rights, for example. This is done, however, at the risk of oversimplification. For example, it has already been seen on at least one other equity crowdfunding platform that investors with 'A' shares notionally benefiting from voting and pre-emption rights have nonetheless found that they have not been investing on an equal footing with professional investors with the same class of shares.

A specific example would be where the company articles allow for an investment round to be completed without going through a formal share offer process with every shareholder, in circumstances where a sufficient majority of investors have already given their approval. In such circumstances  smaller equity stakeholders 
may therefore be denied the opportunity to exercise those heralded pre-emption rights and be further diluted, and as such they will have had no real value, at least for that round. You can end still end up with a 'worse deal' than and be disadvantaged by larger (institutional) investors even when you are offered and receive for your investment the same class of shares.

AIUI, SyndicateRoom is no different in this regard and cannot, and certainly does not, guarantee that all rights notionally attached to 'the same class of share' will be exercisable by all investors in a given company through your platform.  

The specific example I used is a real world example. Following a funding round last year on one of the main equity crowdfunding platforms there is to be a further round of funding in early 2016. The company articles allow for pre-emption rights notionally attached to the (in this case 'A' shares) to be disapplied for subsequent funding rounds and the management of that business has stated that there are already enough votes secured in favour to push this through from a combination of their own voting rights and those of lead investors (between them the founder and the lead investor appear to have controlled c.85% of the company prior to the last funding round based on the publicly available information), so there will be no formal 'rights issue'. It is then at the discretion of the business / lead investors as to whether smaller investors will be offered any opportunity to invest in the new funding round, and/or whether there will be conditions imposed such as a higher minimum investment level, which is the case in the example I used (new minimum £ investment possibly up to 100 x higher than the minimum for the previous funding round IIRC). Whether or not it is a naive view, and I think that it is probably is, some smaller investors in particular might regard this as potentially abusive; it is nonetheless perfectly legal.

These risks are by no means specific to equity crowdfunding. However, and this is where I focus potential concern/criticism, in many of the 'advertorial'-type articles related to equity crowdfunding the simple/natural interpretation of what is being said, particularly for those new to these type of investments, is that if one invests in 'A' shares with voting and pre-emption rights etc attached and/or one has the same class of share as (professional) investors leading the round then you will ensure that you are able to exercise those rights and so, for example, maintain your % stake in the business and mitigate potential dilution (a discussion of whether it always makes sense to follow-on one's investments is another discussion and one of the founders of Seedrs has made some useful/thought-provoking comments on this). It is a marketing message which fits into the narrative some platforms want to put out there, but it is not that simple; it potentially overstates the value of those rights and contributes to a situation where investors do not properly understand the risks and may have unrealistic expectations.

The bottom line for the purposes of this thread is that, AIUI, there is nothing specific to the SyndicateRoom documentation/process (I can't comment to the same degree on other platforms) which affords the investor greater protection in the sort of situation described above by overriding what is in the company articles. It is another risk which must be evaluated at the point of looking to finalise an investment. A logical case might even be made that there is greater scope for such instances to arise where the shareholder base is less fragmented, for example where you have a large proportion of voting rights controlled by insiders (e.g. management) and/or lead investors, which is a consideration more relevant to some platforms than to others. You should nonetheless have an opportunity to view the company Articles of Association / Shareholder Agreement and so can either assess those risks yourself or seek appropriate advice at your own discretion.