A Guide to Equity Crowdfunding in the UK

Equity crowdfunding is where people invest in an early-stage business that is not listed on any stock market. In return, investors receive shares in that company. In case the startup does well, those who have invested in it will profit. This goes the other way around too – if the business fails, shareholders will lose a portion of their investment (or all of it).

Before the launch of equity crowdfunding platforms, only the wealthy could invest in startups. Now anyone can become an investor in an early-stage business, thanks to platforms like Crowdcube and Seedrs. These platforms effectively democratised the crowdfunding process, giving startups the exposure they need.

When it comes to how equity crowdfunding works in the UK, you need to remember that equity crowdfunding platforms facilitate equity crowdfunding investments. There are two types of equity crowdfunding websites – investor-led and entrepreneur-led.

 

• Investor-led crowdfunding platforms

On investor-led crowdfunding platforms, you can only fund startups that have been screened by an adept investor. The expert investor supports the company with their own capital and negotiates the investment terms. The platform then gives the crowd the chance to invest in that business on the same terms that have been negotiated by the leading investor.

• Entrepreneur-led crowdfunding platforms

With these platforms, there is no lead investor and the entrepreneur sets the investment terms. These are the percentage of equity offered in exchange for investment, share price, and many more. Business-led platforms allow you to invest before any negotiations.

Criteria vary from platform to platform. Some platforms will allow you to register as an investor very easily, while others will not. Some crowdfunding websites rely on FCA-approved tests to assess whether individuals can register on their platform.

Platforms like Crowdcube and Seedrs have developed questionnaires that check if an individual realises all the risks associated with crowdfunding. Investor-led platform SyndicateRoom, on the other hand, requires you to self-certify yourself as a knowledgeable investor or an individual with a high net worth.

Whichever crowdfunding platform you choose, you need to do your research on their registration criteria. It can save you a lot of trouble in the long run.

The UK Government has created both the SEIS and the EIS tax relief schemes to promote investments in startups.

• SEIS Tax Relief

The Seed Enterprise Investment Scheme, or SEIS, allows you to claim up to 50% of your investment up to £100,000. Remember that you can only claim your money back up to five years after January 31 in the year when you invested. You can benefit from the SEIS tax relief once the company has been trading for at least for months or spent 70% of the received funding. If you hold your shares for at least 3 years, you may also benefit from CGT exemption.

Let us illustrate how the SEIS tax relief works. Imagine you have invested £10,000 in a company. If the business you invested in doubles in value, you will get £5,000 as a tax bill reduction. Should you sell, you will receive £10,000 and your total tax-free return will reach £15,000.

In a scenario where the company’s value remains the same, you will only benefit from the £5,000 income tax reduction. In case the company fails, you will benefit from the income tax bill reduction (50% of your investment) and the loss relief, which is 45% of your at-risk capital. So, even though you have pledged £10,000 in a business that has failed, you will lose only £2,750* [1].

*How we calculated it:
£10,000 – (£5,000+£2,250)=£2,750

• EIS Tax Relief

The Enterprise Investment Scheme (EIS) allows investors to claim as much as 30% of their investment in income tax relief. It applies to investments up to £1 million.

If you invest £10,000 in a business, you can get up to £3,000 as an income tax bill reduction.

The EIS tax relief is allocated to each individual. If you are married, you can invest up to £2 million per tax year as a couple and be eligible for income tax relief. You need to hold your shares for at least 3 years to be able to claim your income tax relief.

Similarly to the SEIS tax relief, you can benefit from CGT exemption with the EIS tax relief. CGT exemption is available when you hold shares for at least three years and claim the income tax relief on them [2].

Even though it poses certain risks, equity crowdfunding is very advantageous for both investors and businesses.

• Benefits for investors

Your biggest benefit from equity crowdfunding is the potentially high returns. Equity crowdfunding gives you a chance to increase your funds a lot. The company you have invested in could do very well and double, even quadruple in value over time. And this could bring you great return.

Equity crowdfunding allows you to invest small sums across numerous businesses and reap the fruits of their success. That helps you diversify your portfolio, which is always good. Also, you can benefit from the SEIS/EIS tax reliefs we explained above.

Unlike traditional investment methods, equity crowdfunding allows you to own shares without having a high net worth.

• Benefits for businesses

Equity crowdfunding platforms allow you to present your company to a larger audience. As a result, you are likely to raise your target more quickly than using traditional methods for raising capital. It also helps you generate PR and brand awareness for your business.

When you launch an equity crowdfunding campaign, you have the opportunity to involve your customers. You can ask them to become shareholders in the business. That will help you build a strong relationship with your customers.

Equity crowdfunding might sound like rocket science. But it is an easy-to-understand concept and, when done right, it can bring you great rewards.

For more information on how we can support you with your equity crowdfunding campaign, get in touch!