Crowdfunding is a path to raise investment from many individuals who pool their investment collectively to provide the capital needed for a company to grow and develop. Many crowdfunding platforms are sector-agnostic, which means that the investment opportunities are not restricted by industry and may give companies from various sectors access to a large number of potential investors.
Crowdfunding is not something to look down upon, as many household names have raised crowdfunding investments. For example, Snoop, a financial management platform for individuals, raised £10m from Seedrs investors, while Revolut, also a money management platform, raised £1.01m. While crowdfunding may not be a favourite for the more traditional risk-averse investor, it does work and can help kickstart a company’s fundraising efforts.
The process is relatively simple as many companies offer a complete end-to-end service that includes the handling and processing of funds, Companies House paperwork, legal admin, tax relief (SEIS and EIS) forms, nominee administration and customised legal agreements. Overall, the process is relatively straightforward for companies looking to fundraise.
One of the first questions asked by all UK investors is whether the company has SEIS and EIS advance assurance. Many crowdfunding sites, such as Seedrs and Crowdcube, provide a route for investors to receive their SEIS and EIS tax relief in the UK. When companies and investors qualify for SEIS or EIS, the crowdfunding sites also handle the SEIS and EIS documentation. This gives companies and investors the peace of mind that if they invest via the crowdfunding site, there should be little to no problems in the overall SEIS/EIS process.
Many venture capital firms and potential investors do not appreciate fragmented cap tables (i.e. many individual investors); one of the main benefits of crowdfunding is that there is no messy cap table to complicate subsequent finance raises. Crowdfunding investments are represented in a single line under the nominee's name.
One of the advantages of fundraising through crowdfunding is that you will be able to use the engagement letter as a letter of intent for HMRC. This illustrates to HMRC that the Company intends to do a S/EIS round and that the application is not speculative.
Unlike more incumbent fundraising methods, crowdfunding is innovative and built on the concept of raising funding from numerous individuals. Crowdfunding is a channel to raise money for your start-up in an age where anyone can be an investor.