Mark Kenkre explores the landmark Crowdcube compensation case


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Partner Mark Kenkre explores the future of the UK investment crowdfunding marketplace, following the Financial Ombudsman Service Crowdcube mis-selling judgement, in What Investment.

Mark’s article was published in What Investment, 28 July 2021, and can be found here.

Crowdfunding has a glorious history and can lay claim to being the saviour of liberty, literally. In 1885, funds to complete the Statue of Liberty in New York had run dry. Joseph Pulitzer, yes, he of the famous Pulitzer prize, launched a campaign to raise the money needed. His newspaper ‘The World’ asked its readers for contributions. Dutifully, more than 160,000 of them pledged sums ranging from 15 cents to $250. Over $2 million in today’s money was raised. In one fell swoop, the goddess Liberty was saved and crowdfunding was born!

Today’s crowdfunding investors may not be driven by quite such noble sentiments, but they do want and expect accurate information about what they are investing in. A recent decision from the Financial Services Ombudsman (FOS) concerning an investment made through the platform Crowdcube may have raised the bar for crowdfunding platforms offering investment opportunities and seeking funds. Like the Statue of Liberty, it could, albeit in a rather less dramatic way, stand as something of a landmark with major implications for both investors who lose money and the entire investment crowdfunding industry.

The case centres on an investor who put £18,000 into a start-up Chinese takeaway restaurant chain called Zing Zing. He claimed that the business plan provided by the company via Crowdcube failed to adequately set out the company’s true business plan and that the reality did not match the proposed growth strategy. The investment pitch on Crowdcube said:

“Having grown from 2 sites to 4 since their last round on Crowdcube, [the company] is revolutionising the Chinese takeout industry through its takeaway only locations with rapid delivery and custom technology. Now raising funds for further expansion.”

The crux of the investor’s complaint was that Zing Zing did not use the funds raised in the way in which Crowdcube promoted that it would. He claimed the plan led him to believe that Zing Zing intended to invest in multiple new restaurant sites.  However, that did not happen and the business later went into administration. The investor complained that Crowdcube should have vetted the company’s proposals more carefully. He believed that the information provided by the company, via Crowdcube, was “misleading”, and maintained that had he known the true intentions of the company, he would not have invested.

The Ombudsman Ben Waites found the investment pitch was ‘at best unclear, and at worst, misleading’, and upheld the complaint. Mr Waites concluded that Crowdcube had failed to inform investors that Zing Zing’s plans to expand were “not substantiated with sufficient documentary evidence for it to conclude how plausible” they were. That meant that Crowdcube had failed to meet regulatory obligations to act in its clients’ best interest and to make sure that Zing Zing’s pitch was “fair, clear and not misleading”. The investment platform was ordered to repay the investor his £18,000 less any applicable tax relief the investor had enjoyed.

So, does this case represent a game changer for the growing numbers of investors choosing to invest their money through crowdfunding companies? To assess that requires an understanding of both this particular form of investing and of Crowdcube.

Investment crowdfunding is a popular method for small and growing businesses to raise capital from a large number of disparate investors via a single platform. Crowdfunding is a regulated activity and platforms and providers are required to hold specific permissions with the Financial Conduct Authority (FCA).

Crowdcube is a well-known crowdfunding platform which offers businesses a comprehensive capital raising service including overall strategy, communications and legal input into the transaction. It invites investors to ‘own shares in Europe’s high growth businesses’. Its website tells potential investors, ‘whether you’re a beginner or experienced investor, you can join our million-strong community who want to invest beyond their property or pension by building a portfolio of start-up, growth and venture backed businesses, with the potential to deliver significant returns’. It claims impressive results.  The website says, ‘over 50,000 investors have had the chance to realise more than £60 million in returns from investments made with Crowdcube’. It tells prospective investors, ‘Global brands like Nestle, Europcar, Diageo and EDF have acquired businesses that raised with Crowdcube, while others have listed on the stock market or completed a secondary share sale on Cubex.’

The recent FOS ruling raises significant issues and concerns. As a single regulatory decision, it does not have binding consequences for the crowdfunding industry. However, if it is indicative of a wider precedent, then the consequences will be far reaching for crowdfunding platforms. It would essentially mean that they would be expected to foresee future strategic shifts in fundraising companies’ business plans which turn out to have a material impact on investors’ fortunes. Or, at the very least, undertake reasonable diligence in respect of such shifts.  If this proves to be the case, the recent decision is truly a landmark ruling which could mark a crossroads for the UK crowdfunding marketplace.

Platforms will no doubt argue that they simply cannot predict the future of any issuer or business. It is not clear how far the FCA’s regulatory reach will extend in situations such as these. In what circumstances will it be able to hold a crowdfunding platform liable for the veracity of a business plan that changes over time at the hands of the company’s management?  Regulatory intervention by the FCA may be required to clarify this.

However, the FOS ruling does seem to imply that crowdfunding platforms owe a duty to investors to test the credibility of business plans and statements made by companies seeking to raise money. That undoubtedly opens a door, perhaps even a floodgate, for disgruntled and disappointed investors. It could lead to multiple claims from those who have lost money and can point to misleading statements by companies which the crowdfunder has failed to scrutinise sufficiently and warn investors about.

In February 2024, our firm changed its name from Keller Postman UK to KP Law.

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