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.

The Importance of Aggregation

We at Seedrs have long argued that when lots of investors invest together in a startup, it is essential that the investors be aggregated together into a nominee structure or special purpose vehicle (SPV). We have written about this extensively, including in this blog post and this video, and it formed the core of my recent testimony before a U.S. Congressional subcommittee.

We believe aggregation is one of the most important aspects of equity crowdfunding, and that if you are investing through a platform that does not provide it, you are highly unlikely ever to see returns on your investments.

The rationale behind aggregation is that without it, you are faced with two unappealing choices:

One is for each investor to become an individual direct, registered shareholder and an individual party to a subscription agreement (which is sometimes called a shareholders agreement or investment agreement). As we explain here, this approach may provide investors with the protections they need, but it is crippling to the company. For a subscription agreement to work, it often requires consents or waivers of all parties, and when there are hundreds of individual parties, it is usually impossible to get every one to give such a consent or waiver. This can prevent the company from raising additional capital or agreeing to a takeover and, as a result, can often be the company’s death knell.

The alternative option—and the one used by the other major UK-based equity crowdfunding platform—is to do away with the subscription agreement entirely and have investors hold their shares on an unprotected (and often even non-voting) basis. This is okay for the company, but it is a disaster for investors and means that, if the company is successful, the investors will not participate in that success. We discuss the reasons for this here.

Aggregation under a nominee structure or an SPV provides a simple solution to this problem. The investee company issues shares to the nominee or the SPV, who holds them on behalf of the underlying investors and enters into a subscription agreement with the company for the investors’ benefit. This means that the investors get voting shares and the full protections of a subscription agreement, but it also means that when consents or waivers are needed, only one signature (that of the nominee or SPV) is required. The company can thus grow and exit, and the investors can participate in the company’s success.

A Few Larger Holdings

Aggregation can work just as effectively for a small group of investors as for a large one. We have completed several deals with only a small handful of investors, where they chose to use our nominee structure for the value it provided them. Even quite large investors often choose to hold their shares through our nominee structure because of the associated benefits of simplicity, efficiency, tax paperwork and administrative oversight. And there is no downside to an investor group of any size holding shares through our nominee structure other than the small carry its members pay if the investment is successful.

However, the necessity of aggregation diminishes when a very limited number of investors is involved. If one or two large angels wish to hold their shares outside the nominee structure, they can enter into their own subscription agreement with the investee company in parallel to ours. The company will then need to obtain consents and waivers not just from us but also from those angels, but because there are only a few of them, the increased burden is manageable—it becomes a matter of obtaining three signatures in instead of one, which is a vastly different proposition from obtaining 30 or 300 signatures. The investors thus receive the protections they need, while the company’s growth is not stymied.

How many investors can hold outside the nominee and be parties to a subscription agreement directly before the company suffers? Two, five, ten? There isn’t a definitive answer, other than to say the fewer the better. We think that by setting the minimum for holding outside the nominee structure at £25,000, and requiring the investee company’s consent, that will help ensure than in most deals no more than one or two investors are holding directly.

Practicalities

If you are an investor who plans to invest £25,000 or more in a Seedrs campaign, and you wish to hold your shares outside the nominee structure, you just need to follow a few steps:

  1. Discuss this with the company and get their consent before you make your investment through Seedrs.
  2. Once you have the company’s consent, you can make your investment at any time, but you will need to notify us of your intention to hold your shares outside the nominee structure before the campaign hits 100% of its target.
  3. After the campaign hits 100%, you will need to enter into your own subscription agreement with the company. This agreement must be on the same economic terms as those in the Seedrs campaign, but if there are non-economic terms you wish to add (such as a board observer role), then you are welcome to negotiate them with the company. Please note that Seedrs will not be able to assist you with this agreement, and you and/or the company may need to hire lawyers or other advisers for this process.
  4. When you have agreed your subscription agreement with the company, let us know, and we will send you a short waiver letter that hands responsibility for the investment over from us to you. Once you have signed it, we will release your funds from our client account to the company.
  5. Going forward, administration of the shares you have purchased (including ensuring that they are duly issued) will be your responsibility, as will matters like collecting your tax relief forms and obtaining ongoing information from the company. Because we are taking no responsibility for your investment at this stage, we will not charge you the carry that we charge to investors for whom we perform services as nominee.

If you have any questions about how this works, please get in touch, and we will do our best to answer them.

Implications for Seedrs Campaigns

A final but important note is on how direct ownership impacts the totals displayed on a given Seedrs campaign.

The way that numbers are reported is one of the more fractious areas of equity crowdfunding at present. Because crowdfunding success depends a lot on momentum, it can make a meaningful difference whether or not a given investment is treated as being part of a campaign and therefore included in the totals listed on the platform.

Some platforms will include in a campaign funds that have been invested long before the campaign went live, and even on different economic terms. We think that this is dishonest, and it is something we would never do.

Instead, our rule from day one has been that funds can only be counted as part of a campaign if (1) they are committed while the campaign is live on the platform, (2) the funds actually flow through the platform and (3) the investment occurs on the same economic terms as the rest of the investments in that campaign.

We believe that this is the appropriate way to demonstrate a campaign’s genuine momentum. And it means that investments of all sizes can be included in the campaign, where those investments really are part of the momentum—the only difference being how they’re held afterwards. Where an investment was made before the campaign is live, through different channels or on different economic terms, though, it will not be shown as part of the campaign total.

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