Tag Archives: Investor Protection

Choosing to hold shares outside our nominee structure

Today we are announcing a new Seedrs policy that codifies an informal practice we have developed over time:

If an investor invests £25,000 or more into a given campaign, and she wishes to hold her shares directly rather than through our nominee structure, she is welcome to do so provided that the company agrees and the investment terms are the same. Shares held outside the nominee structure will not be subject to our 7.5% carry.

This blog post lays out the rationale for this policy, the practicalities for making use of it and a few other important notes.

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Equity crowdfunding term sheet

At Seedrs, we hold ourselves, our startups and our investors to very high standards because we want every company that raises funding on Seedrs to be set up with the best chances for success in the future. Achieving success for a startup often means being able to go on and raise follow-on funding from large angel syndicates or venture capital firms and eventually go on to a successful merger, acquisition, private equity investment or IPO.

Seedrs Term Sheet May

The new plain English equity crowdfunding term sheet from Seedrs contains a summary of the key legal terms.

We’ve always set our legal standards at the level needed to be compatible with the rest of the startup funding ecosystem. This means putting in place very specific investor protections, contractual agreements and making sure that all the paperwork is in order.

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Welcoming the new FCA crowdfunding rules

In March the FCA enacted a new set of equity crowdfunding rules. It may come as a surprise to some, but equity crowdfunding has been regulated in Britain since 2000, long before crowdfunding even existed as a concept.

FCA Equity Crowdfunding Rules

The Financial Services and Markets Act requires firms that arrange transactions in investments, including shares, to be authorised by the appropriate regulator and adhere to a strict set of regulations. That was true regardless of whether those transactions were arranged online or offline, and it applied just as much to novel platforms as to old-fashioned investment firms.

When we were building Seedrs, we thought that rule was quite clear, and as a result we waited to launch until we had authorisation from the Financial Services Authority (now called the Financial Conduct Authority, or FCA).

New UK equity crowdfunding rules

Unfortunately for the industry, one platform ignored these rules and launched without authorisation, before eventually being compelled to seek approval. Shortly afterwards, the FCA decided that, in order to avoid a repeat of this type of behaviour, it would adopt rules specific to equity crowdfunding.

After a consultation process, the new equity crowdfunding rules were enacted in March 2014. Seedrs welcomes the new rules, as we believe they provide clarity to investors and platforms alike. Proportionate regulation helps markets thrive, and we believe the rules the FCA adopted strike an effective balance—and certainly one that is better than what many other countries are currently proposing.

Who is eligible to invest through crowdfunding?

As it happens, the new rules do not apply to Seedrs directly, as we have chosen from the beginning to be regulated as a” fund manager” rather than as a mere arranger. This is because, beyond simply introducing investors to startups, we act as their nominee, enforcing shareholder protections and helping to ensure that they earn returns from successful businesses—something that many other crowdfunding platforms don’t do. We’ve long advocated for the importance of a nominee structure.

Importantly, the exact same investors are eligible to invest through Seedrs as are eligible to invest through the platforms that come under the new rules.

In both cases, investment is open to any investor who can demonstrate that he or she has the experience and knowledge required to understand the investments being offered. Under the new crowdfunding rules, this is called an “appropriateness test”, whereas under the Seedrs structure it is called an “elective professional client categorisation”, but the standard of the test is the same.

Crowdfunding Regulations

Seedrs combines true crowdfunding with professional grade investor protections.

One difference that does result from our regulatory categorisation is that investors who use Seedrs are not subject to the much-maligned “10% requirement”, which restricts investors to investing no more than 10% of their net assets in crowdfunding investments per year. That said, we encourage all investors to build diversified portfolios and only allocate what they believe to be a reasonable proportion of their capital to early-stage investments.

Regulation will continue to be an important part of the crowdfunding discussion, and as the industry grows, there will likely be further modifications of the rules. We look forward to engaging in this process: having been the first regulated equity crowdfunding platform in the world, we believe that complying with applicable law is essential. We are pleased that the clarity provided by the new rules will help to ensure that others do so as well.

Protecting small investors in equity crowdfunding rounds

People invest on Seedrs for many reasons. To support friends or family, because they love a particular business idea, or they just want to invest in a new asset class. But one thing that our investors have in common is that if the company they invest in is successful, they want to share in that success.

Investor Protection

In traditional forms of financing, large professional investors will agree terms with a company to prevent their investment from being diluted when the company issues more shares, and to ensure they benefit from share sale opportunities.  However, normally a small investor simply will not have the leverage to negotiate such terms.

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