{"id":869,"date":"2013-02-04T00:00:00","date_gmt":"2013-02-04T00:00:00","guid":{"rendered":"https:\/\/www.seedrs.com\/learn\/blog\/it-isnt-nominal-why-a-nominee-structure-is-vital-in-equity-crowdfunding\/"},"modified":"2024-07-30T11:51:43","modified_gmt":"2024-07-30T10:51:43","slug":"nominee-structure-equity-crowdfunding","status":"publish","type":"post","link":"https:\/\/europe.republic.com\/insights\/investing-features-insight\/nominee-structure-equity-crowdfunding","title":{"rendered":"It isn\u2019t nominal \u2013 Why a Nominee Structure is Vital in Equity Crowdfunding"},"content":{"rendered":"

One of the most important features of Republic Europe is our nominee structure, whereby we hold and manage the shares of startups on behalf of the underlying investors after an investment is completed.<\/p>\n

\"\"
Using a nominee structure makes equity crowdfunding easier to manage.<\/figcaption><\/figure>\n

While it may seem like a technical point, this type of structure is actually essential to any equity crowdfunding model: it is necessary not only to enable startups to raise follow-on funding but also to ensure that investors\u2019 interests are protected.<\/p>\n

What is a nominee?<\/b><\/p>\n

A nominee arrangement is a very common structure whereby the nominee holds legal title to the shares for the benefit of another person. This means that Seedrs (trading as Republic Europe) is the legal shareholder in the relevant company\u2019s shareholder register, but we hold those shares on behalf of the various individuals who had invested in the company through Republic Europe. The effect of this structure is that while Seedrs holds the shares, the full economic interest in them – including the benefits of individual tax reliefs such as SEIS and EIS – are passed through to the underlying investors. This arrangement is very similar to a trustee relationship, as well as to the structures used by stockbrokers and other types of intermediary platform.<\/p>\n

Benefits for investors<\/b><\/p>\n

In the absence of a nominee arrangement, investors would hold the shares in each investee company directly as registered shareholders. It is difficult to overstate the problems this can cause when there is a multitude of investors, each making many small investments. Investors are left to manage the administration of their investments on their own, tracking corporate events, attending meetings and issuing consents where necessary. The bureaucratic hassle alone can be a pain, but the far greater problem is that there is no coordinated effort to monitor and enforce shareholder rights. And without this kind of coordinated effort, minority shareholders can easily fall prey to abusive actions by directors and the majority shareholders.<\/p>\n

There are some who argue that this is addressed by investing only in entrepreneurs whom you trust. Unfortunately, that isn\u2019t enough: as time goes by – especially if the company becomes successful – new management and investors may come into place, and they may act far less honestly toward the original shareholders. That\u2019s why angel investors and VCs use and enforce subscription agreements when they make investments: no matter how honest the entrepreneur may be, his or her word simply isn\u2019t enough once the company starts to grow. The worst thing that can happen to an investor is for the company to become hugely profitable, but for the investor not to realise the success because his or her rights weren\u2019t protected along the way. And the risk of that happening is greatest when lots of small shareholders hold shares directly without anyone monitoring and enforcing their rights.<\/p>\n

Our nominee structure addresses this. We get rid of the administrative hassle by taking care of all the technical shareholder work while letting investors track and engage with their investments directly through the platform. More importantly, by monitoring the company\u2019s compliance with its subscription agreement, we help ensure that its investors\u2019 rights are protected\u2014so that when the company has a big exit one day, the investors get to realise the full benefit of it.<\/p>\n

Benefits for startups<\/b><\/p>\n

Because we act as nominee for the underlying investors, a startup needs only to deal with us for administrative matters like consents and shareholder votes. This is far easier from an administration perspective than having to send notices to, and even solicit approvals from, hundreds of scattered investors. At the same time, the startup can take full advantage of the invaluable feedback, experience and enthusiasm the investors can offer. So it is the best of both worlds: the administrative work only needs to be done with us, while the substantive support can come from all of the investors.<\/p>\n

But this is not just about making entrepreneurs\u2019 lives easy; it is also a critical element to ensuring that the startup can raise further funding down the line. Private company finance can be complex, and often various consents, waivers and other unanimous shareholder actions are needed for the company to raise additional money. If getting a consent depends on tracking down hundreds of investors all over the country (or the world), then as a practical matter the consent will never be obtained, and it is highly likely that the financing won\u2019t be able to go through. As countless angels and VCs have told us, if they saw a widely-scattered shareholding base with no nominee in place, they would be deeply reluctant, or even entirely unwilling, to make an investment in the company.  The startup is dead in the water because its shareholding base makes it impossible to raise more capital.<\/p>\n

Our nominee structure fixes this problem. We give the consent, sign the waiver or take whatever other action is needed to ensure the company can progress with its financing. It\u2019s easy for angels, VCs and other later-stage investors to work with, which means that they\u2019re happy to invest in a company that has been financed through Republic Europe. That\u2019s good news for the company and it\u2019s good news for its investors.<\/p>\n

Final thoughts<\/b><\/p>\n

As crowdfunding has emerged in recent years, there has been a good deal of confusion between rewards-based and equity-based models. The former is about purchasing goods, the latter a type of investment, and while it\u2019s obvious to some that these are very different things, many others treat them as one and the same.<\/p>\n

One area where this confusion has been particularly pronounced is in the view that rewards crowdfunding and equity crowdfunding can work on the same structures and involve the same (lack of) interaction by the platforms after the funding is completed. The argument goes that on Kickstarter, a reward (such as a watch) gets shipped, and the platform has no further involvement – so in equity crowdfunding a share certificate can get shipped, and that\u2019s the end of it.<\/p>\n

But investing is very different from buying a product, and what happens after the deal is \u201ccompleted\u201d is far more complex when there is an investment involved. A different structure – one where the platform doesn\u2019t just disappear from the picture, but instead takes the actions necessary to ensure that both investors and entrepreneurs benefit from the deal – is necessary. That, in a nutshell, is what the Seedrs nominee structure is all about.<\/p>\n

– Jeff Lynn <\/i><\/p>\n","protected":false},"excerpt":{"rendered":"

One of the most important features of Republic Europe is our nominee structure, whereby we hold and manage the shares of startups on behalf of the underlying investors after an investment is completed. While it may seem like a technical point, this type of structure is actually essential to any equity crowdfunding model: it is<\/p>\n","protected":false},"author":7,"featured_media":2030,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[297],"tags":[301],"class_list":{"0":"post-869","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-investing-features-insight","8":"tag-trends-updates"},"yoast_head":"\nWhy Our Nominee Structure Is So Important | Seedrs<\/title>\n<meta name=\"description\" content=\"Why is our nominee structure so important? 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