Investment Guides

Equity Crowdfunding Investment Structures

Equity Crowdfunding Investment Structures
Lily Bridgwood
Written by Lily Bridgwood

In a year where more than 20 companies raised over £1m amongst the equity crowdfunding platforms, it can be inferred that this in this ever-changing world of alternative finance, equity crowdfunding is emerging from its infancy and finding its feet. Whilst the industry now values at over £3.2bn in the UK, there remains one topic of hot debate, and that falls on the investment structures for shareholders operated through the platforms. Typically, equity crowdfunding platforms either operate a nominee structure or a direct shareholder structure. This article looks into these equity crowdfunding investment structures, and how their approaches differ.

Nominee Shareholder Structure


How does it work?

Platforms hold and manage the shares invested in crowdfunding business on behalf of the investors. The nominee (the platform in this case) is therefore the legal shareholder in the business’ shareholder register.

What to be aware of?

Platforms who advocate this approach may tell you that the administrative burden of tracking investments, and everything that goes along with it, is reduced. They are also adamant that investors’ rights like pre-emption rights and tag-along rights are protected. These platforms believe that such a structure will enable them to attract more diverse companies and prevent shareholder dilution. Of course dilution is a commonplace feature of angel investing, but having their rights protected should ensure that smaller investors aren’t susceptible to aggressive dilution of their shares. Seedrs have openly stated that they’ve had to act on behalf of investors to waive certain rights so that VCs could join second or third rounds. However, they state that they don’t waive rights if there is any risk of ‘malevolent dilution’.

Pros & Cons of the Nominee Structure: 

PROS

CONS

  • It allows the rights of the investors to be protected
  • Effectively enforces any shareholder rights on behalf of investors
  • Company only has to deal with ONE shareholder on its books, send shareholder resolutions to ONE shareholder and manage only ONE shareholder.
  • Can result in an increase in the cost of raising money as the crowdfunding platform has to remain involved in the management of the growing portfolio.

Direct Shareholder Structure


How does it work?

Each investor becomes a legal individual shareholder of whatever business they choose to back. All but the largest investors receive “Class B” shares. This essentially means that they have no voting rights when it comes to big company decisions.

What to be aware of?

Crowdcube have explained that investors are 100% protected by Company Law and they are very transparent when it comes to ensuring that investors know what their investment means going forward.[3] However, the downside is that they have to deal with hundreds or even thousands of investors in some cases and this is not a simple task for any small to medium sized enterprise.

Pros & Cons of the Shareholder Structure:

PROS

CONS

  • Greater sense of autonomy and ownership for individual investors
  • No intermediaries (or their associated fees)
  • Allows fundraisers to tap into valuable feedback from the ‘crowd’
  • Company is left with a lot of shareholders on their share register.
  • Company has to manage a lot of stake holders.
  • Processes for managing corporate activities can become complex

What else should you as an investor or a business bear in mind?      


There is a huge amount of choice out there in terms of where you can raise or invest. Some platforms like Invesdor offer different options for companies wishing to raise capital rather than enforcing a  clear cut decision between the direct and nominee structure.

It is critical that a company considering crowdfunding fully understands all of the possible models before making a decision over which platform to use. The same must be said for investors who should always perform full due diligence before investing.

Please visit the equity crowdfunding section of OFF3R to view the latest investment opportunities. Your capital is at risk.

Sources: 

https://www.ft.com/content/e9d998c2-ee93-11e4-88e3-00144feab7de
https://www.crowdcube.com/pg/investee-terms-1503

About the author

Lily Bridgwood

Lily Bridgwood

Lily is the Partnerships Associate at OFF3R. She has previous work experience in both the corporate and start-up environments. She joined the OFF3R team in October having recently graduated with First-Class Honours in International Business from the University of Edinburgh.