Crowdfunding’s use has grown significantly in recent years to the point where it is now a common method of fund raising for early stage and growth companies.
The regulation around crowdfunding is still relatively new and the FCA opened a consultation on the rules around loan-based crowdfunding back in July of this year, an example of how rapidly crowdfunding is expanding.
‘Equity-based’ crowdfunding is the form that most will be familiar with. This is where the ‘crowd’ invests through a large amount of individuals, each investing a relatively small amount in return for shares.
Crowdfunding can be an invaluable tool for any start-up business that is looking to grow. Typically, the ‘crowd’ are not just looking for a return on their investment, but are also looking to support a brand they believe in. The advocacy of the crowd can prove invaluable in promoting the business.
The biggest example of this is Brewdog, who are the first company that enter into people’s minds when discussing crowdfunding. There will be many of us who have been proudly told by a friend or colleague that they have shares in Brewdog whilst enjoying some of their product!
Whilst there are many benefits for those looking to fundraise through crowdfunding, the thought of dealing with multiple hundreds of shareholders would create concerns for any business – the administrative burden alone is enough to cause a headache.
Most crowdfunding platforms offer a solution to this problem with the concept of a nominee shareholding. This is where the platform have a limited company solely for the purpose of holding shares on the crowd’s behalf.
The structure is set up so that whilst the nominee company is the legal holder of the shares, the benefits and rights attaching to the shares rest with each individual member of the crowd. This means that, rather than hundreds of individually named shareholders as a consequence of crowdfunding, there is only one – the nominee company.
Whilst this makes life much easier for businesses in terms of being able to go to the shareholder base with any decision making that may be required, there are some aspects of nominee shareholding structures that young companies should be aware of.
Under a nominee arrangement the individual who is entitled to the benefits attaching to the shares can require the nominee to transfer the legal title of the shares back to them. Bringing back the issues associated with a large and numerous shareholder base.
The two main issues that this causes are in relation to voting and when a company is looking toward the next stage of funding.
Actions such as issuing new shares or adopting new articles of association usually require a resolution of 75% of the shareholders to be passed. Companies should therefore be aware that the passing of these resolutions can take considerably more time where there are more individual shareholders to reach out to.
Furthermore a question is raised in terms of a large shareholder base when a business looks toward the next stage of funding. We have seen instances of large VC funds being put off by large numbers of individual shareholders and the drag that this can have.
However, instances of the nominee arrangement collapsing are rare and usually the use of a nominee company works well for those businesses looking to grow through crowdfunding. Many businesses feel that this possible downside to crowdfunding is outweighed by the benefits it brings.
If you would like to find out more about Crowdfunding and how MBM Commercial can help, please contact Craig Edward or another member of our Corporate team.
DD: 0131 226 8244