Crowdcube, the UK’s biggest crowdfunding platform, beefed up its vetting process for companies looking to raise cash on the website in the wake of the collapse of claims management company Rebus, which received investment on the platform last year.
Crowdcube co-founder Luke Lang said the failed business was not “trying to pull a fast one” after accusations that Rebus misled investors in its crowdfunding campaign.
Lang told BI: “I’ve been involved with Rebus a lot since and had conversations with the chairman and I can assure you that they weren’t trying to pull a fast one. I think sometimes people write the story that they want to write and jump to the conclusions that they want to.”
Crowdcube lets people invest in early stage, fast-growing businesses but this type of investment is inherently risky. Between 70% and 90% of startup businesses fail, according to estimates.
Rebus helped people make claims for being mis-sold complex financial products that are later deemed tax avoidance schemes. 109 Crowdcube investors helped the company raise £816,790 — more than its £600,000 target — eleven months ago. The largest investment was £135,000.
But the company, which was valued at £12 million in the funding round, collapsed into administration in February. It is thought to be the biggest crowdfunding failure in the UK to date.
Since the collapse, the Times has accused Rebus of misleading investors over the state of its financial health, something the company’s former management and Crowdcube deny. Rebus held meetings in 2014 with restructuring company Resolve to discuss financing options because of “difficulty in generating the required cash to continue to trade.” But this was not disclosed in its pitch to investors on Crowdcube.
Crowdcube and Lang have said they were not aware of these meetings but wouldn’t have been alarmed if they had.
Lang told BI: “Rebus and Resolve had been working together for years. It made sense for Rebus to have a conversation with a company they already had a relationship with about financing. They had a couple of meetings to discuss funding options and the business decided they wanted to raise equity financing rather than debt at the time.”
We’ve taken a look at the Rebus situation and realised we possibly could have done more in terms of doing background checks
He added: “The business clearly in its financial projections said this is a round of funding that we’re going to do now but we’re going to need more funding later in the year. That was very clear in their pitch.”
Rebus chairman Adrian Cox told Business Insider over email in the wake of the Times report that the paper “misrepresented the facts despite being told by Rebus and [sic] Crowd Cube what actually happened.”
The Times also highlighted that Rebus’ pitch featured an advisor who was banned by the City regulator in 2012 for illegally promoting a failed investment scheme.
Lang admits that the background checks on key company personal were shown to be limited in that case, telling BI: “We’ve taken a look at the Rebus situation and realised we possibly could have done more in terms of doing background checks in terms of key persons within the pitch.
“Our background checks into the people were, at the time, limited to directors of the company. Since Rebus we’ve expanded that to key persons within a pitch. If you’ve got an advisor to a company that’s central to a business’ pitch and therefore material to its success or failure, then we’ll do background checks on that individual.”
Lang says that in the last year Crowdcube has also:
- Integrated company and director checks from a 3rd party provider as well as extended background checks to prominent people within a pitch, not just directors;
- Partnered with “a market leading information provider” to monitor the health of companies after they’re funded;
- Partnered with “the most forward thinking anti-money laundering and know your customer providers”;
- And introduced a standard process for Crowdcube’s legal team when reviewing new companies apply to raise money on the platform.
But he adds: “Richard Rhys [the advisor banned by the City regulator] was front and centre of the pitch. His background was widely discussed on the pitch message board. Investors were fully aware of his background before they invested.
“It’s worth noting as well that something like 90% of the investment came from sophisticated investors, people ticking the box saying ‘I make more than two investments like this per year, I’m a High Net Worth Individual.’ It was really led by angel investors rather than the crowd. That’s often lost in the Rebus story. It’s portrayed as the crowd losing out.”
‘90% of the businesses that apply to us don’t get through to the site.’
Speaking more generally about due diligence of companies applying to raise money on Crowdcube’s platform, Lang told BI: “90% of the businesses that apply to us don’t get through to the site. There are lots of business that came to us and for financial reasons we turned them down. We thought the valuation was too high or there was some hidden debt from a few years ago, whatever it might be that we couldn’t get comfortable with.
“Days later they pop up on competitors sites which from my point of view is really concerning because a) it takes us weeks to do our due diligence process, not days and b) there were clearly fundamental reasons why we rejected those businesses.”
Lang says Crowdcube has a team of six in-house analysts who review all the potential listings on the platform. He says: “One guy worked at Citibank, one guy worked for Deutsche Bank, another is ex-Goldman Sachs. These guys look at all of the businesses that are coming through.
“They benchmark valuations against industry standards and they offer guidance to try and rein them in or increase them when they’re not high enough. If they don’t like the look of a deal then they have the right to say we don’t want to put this deal live and they have done that on a number of occasions.”
Crowdcube is the UK’s biggest crowdfunding platform, having raised over £160 million for companies such as BrewDog, JustPark, Mondo, Camden Town Brewery and more since 2011.
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