Crowd Control: CMA Blocks Equity Crowdfunding Merger

Crowd Control: CMA Blocks Equity Crowdfunding Merger​

The Story

Last week, the UK Competition and Markets Authority (‘CMA’) provisionally blocked a merger between two leading equity crowdfunding platforms, Crowdcube and Seedrs. The companies subsequently abandoned the deal, with Crowdcube stating it was “obviously disappointed” with the CMA’s decision and Seedrs posting a more tongue-in-cheek response on Twitter. Structured as an acquisition of Seedrs by Crowdcube, the merger would have created a £140 million combined entity. The CMA was concerned that this combined entity would have been a virtual monopolist in the UK equity crowdfunding market, able to charge higher fees while having a lower incentive to innovate.

Equity crowdfunding is a relatively new source of finance for small and medium-sized enterprises (‘SMEs’). In 2011 there were just eight deals on platforms like Crowdcube; last year, there were 489 (British Business Bank). Crowdfunding has become particularly popular in the fintech and food/beverage sectors; digital banking firms Revolut and Monzo, plant-based meat producer THIS and coffee chain Grind have all enjoyed multi-million pound campaigns. The basic principle is that start-ups which are unable or unwilling to obtain finance from banks or private equity funds can instead pitch to the general public. Would-be investors can peruse each company’s fundraising page and join online Q&A sessions with the directors. The minimum investment amount is typically set at just £10 but don’t be fooled – over £2 billion has been invested on Crowcube and Seedrs, and the number of campaigns raising over £1 million is on the rise.

Various investment rules make this picture more complicated. For a start, equity crowdfunding platforms must be authorised by the Financial Conduct Authority (‘FCA’) as they are involved in arranging deals in securities. Furthermore, the FCA restricts most individuals to putting a maximum of 10% of their investible assets into equity crowdfunding campaigns. This is because investing in early-stage companies, whose shares are “hard to value independently or sell on a secondary market”, is justifiably considered a high-risk activity; those who aren’t high-net worth individuals or professional investors need a degree of protection (FCA). In addition, private companies aren’t technically allowed to offer shares to the public. Crowdcube and Seedrs get round this restriction by requiring all investors to register with them before accessing the full details of a given campaign; this way, an individual investor can be seen to have ‘elected’ to receive an offer to invest rather than receiving one at random (Burges Salmon).

What it Means for Law Firms and Businesses

The rise of equity crowdfunding presents clear opportunities for general corporate and emerging companies lawyers, while tax advice might also be sought. Individuals who invest in equity crowdfunding campaigns might be eligible for income and capital gains tax relief under the Enterprise Investment Scheme depending on, among other things, the value of the company’s assets.

Returning to the proposed Crowdcube/Seedrs merger, Bird & Bird acted for Crowdcube, while Seedrs’s legal counsel is unknown. Two aspects of the CMA’s decision in this case might raise eyebrows. The first is how the relevant market was defined. The CMA took the view that Crowdcube and Seedrs really only compete with each other and therefore allowing them to merge would be bad for competition. Crowdcube and Seedrs, however, viewed themselves as competing against angel investors and venture capital firms too; their argument was that merging was the only way to effectively challenge these “established providers of SME equity funding” (Seedrs). Some commentators have criticised the CMA’s approach as overly narrow and “one dimensional”; others have vindicated it, reporting a feeling of “relief the merger has been scuppered” among start-ups using each platform (AltFi; The Grocer).

The second aspect is the CMA’s rejection of the ‘failing firm defence’. The idea, here, is two companies claiming that unless they merge, one or both of them is likely to become insolvent. This means that the merger itself isn’t responsible for any reduction in competition. Crowdcube and Seedrs claimed exactly this. Based on their financial reports for 2019, they are both lossmaking companies which would have to reduce their operating costs by around 35% and 50% respectively to turn a profit. In these circumstances, it was submitted that neither platform could “achieve profitability … in the absence of the … merger” and the synergies it was expected to bring (Crowdcube). Despite having accepted a not dissimilar argument last year when Amazon bought a stake in Deliveroo, the CMA was unconvinced. For competition enforcers, in this instance, two was a crowd.