When Restrictions Offer Opportunity

This piece is part of a mini-series developed in collaboration with VentureFounders. Vanessa Cowling, General Counsel at equity investment platform VentureFounders, explains how Corporate Governance is helping to shape the early-stage investment market.

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Despite the uncertainty brought by Brexit, whether it be hard, soft or something squidgy in the middle, the UK remains a desirable place to live, work and invest. The combination of, amongst other things, access to talent, the familiarity of the English language, a competitive tax environment and a fair and stable legal and regulatory environment make the UK a hotspot for domestic and foreign investment.

A key reason why investing in UK companies is so attractive are our oft copied business laws, particularly our standards of corporate governance, or the system of practices and processes that relate to the operation of a company and ensure there is transparency and accountability. Companies that follow robust corporate governance practices provide investors with the reassurance that the company is well run and the directors are considerate of its stakeholders.

The weighty body of rules relating to leadership, board effectiveness, accountability, remuneration and shareholder relations that apply to listed companies are embedded into UK legislation. However, the same level of regulation does not apply to privately owned companies and even less so to small early stage or growth companies that typically use crowdfunding as a source of capital.

Typically, these companies will usually have a shareholder base made of family, friends and maybe a small smattering of angel investors. As a result, at its best corporate governance at this level is informal and limited.

Until now.

Crowdfunding has added an interesting and new dimension to corporate governance for early stage companies.

In exchange for taking money from the crowd, all forms of crowdfunding require companies to be open and honest. Companies looking to use investment based crowdfunding or loan-based crowdfunding to raise money are particularly ‘forced’ to embrace transparency and accountability earlier than they would otherwise have had to, in order to secure investment and to maintain happy and contented shareholder base:

• Many crowdfunding platforms will assess the board, its composition and its effectiveness. In addition, platforms may look at the company’s relationship with existing investors – is the relationship collaborative rather than adversarial?; is the board open?; is reporting transparent and timely?, etc. Resolving any significant deficiencies in this area may become a condition of funding or if they are insurmountable, a company won’t be accepted onto the platform.
• The communication lines between crowd investors and companies are kept open after money is invested. Portfolio companies at VentureFounders for example, must regularly report on the company, its financial performance and any other material developments and this information is distributed to our investors. Many platforms like VentureFounders also act as conduit allowing investors to question and challenge management throughout the life of their investment.
• The nominee structure operated by VentureFounders and several other platforms grants investors enhanced shareholder rights.
• The public nature of crowdfunding also adds further ‘encouragement’ to stay engaged with the investor base – a disgruntled crowd investor will be vocal, belligerent and resort to social media to air their grievances. As well as reputational damage, it also affects the ability to go back to the crowd for more money.
• The divide between investor/customer is blurred – a lot of investors are also customers of the business or in the case of B2B companies, employees of customers. The recent green paper on corporate governance reform indicates that one of the three aspects of corporate governance where the government think there could be scope to build is the strengthening customers’ voice at board level. This is clearly already happening in crowdfunding.

In summary, crowdfunding can provide a mechanism for investors to ensure that early stage companies are transparent, being run in their interests and the directors are being held accountable. Crowdfunding platforms are acutely aware that this is also in the best interests of our youthful industry – maintaining trust and confidence will be the key to the long-term success of the alternative investment ecosystem.