BrewDog was once the poster-brand for crowdfunding but its collapse has left a bitter taste of the risks of backing smaller companies.
The drinks brand launched in 2007 and built up a following helped by 200,000 investors, known as EquityPunk, funding it to the tune of £75 million.
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Dan Coatsworth, head of markets at AJ Bell, said: “BrewDog’s rescue deal emphasises the risks of using crowdfunding schemes to invest in companies and how it is very different to buying shares on the stock market.
“Crowdfunding is often dressed up with the promise of perks such as money-off discounts, but what many people miss is the fact they’re potentially locked into the investment for a long time and might be in the dark as to what’s going on.”
In the case of BrewDog, Coatsworth highlighted that it only had occasional ‘trading days’ where crowdfunding investors could sell their shares outside formal fundraisings.
The last time this happened was 31 August 2022, which meant any investor seeing signs of trouble in the business in recent years couldn’t do anything about it unless they found a willing buyer for their stock privately.
Equities
Crowdfunding emerged over the past decade as an alternative to the traditional ways of putting money into companies.
It let unlisted firms raise funds directly from the public, arguably giving consumers access to the world of investing that they may have previously felt shut out of.
Crowdfunding investors are supposed to be asked if they understand the risks of losing everything and it can be a lot harder to sell out and get your money back compared with putting money into equities.
Plus, you could earn profits from equities tax-free from a stocks and shares ISA.
Coatsworth added: “Investing in companies on the stock market means there is a clearer exit path. You can sell to another investor during stock market hours, although there is no guarantee there’s always a willing buyer and/or someone prepared to pay what you want.
“Crowdfunding is very different to retail investing on the stock market. With crowdfunding, there is less transparency into a company’s accounts and often little insight into its latest trading strength or weakness. That compares to companies on the stock market who have an obligation to publish accounts every six months, and many will provide trading updates once a quarter.
BrewDog going into administration before its takeover by Tilray means its ‘Equity for Punks’ crowdfunding investors have lost everything.
While the same would apply to a company on the stock market going into administration, Coatsworth highlights that investors in quoted companies might have had a chance to cut some of their losses if they bailed out following warning signs, “rather than have their hands tied and then lose everything.”
Investors could also back qualifying Alternative Investment Market shares, which currently get 100% relief from inheritance tax after two years, dropping to 50% from April 2026 with a rate of 20% on the remaining value.
Investing in Venture Capital Trusts
Unlike crowdfunding, investing through venture capital trusts (VCTs), enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS) have routes that let investors offset losses.
Investors who back VCTs, which invest in UK scale-ups, can benefit from upfront tax relief of 30%. The incentive reduces to 20% from April. All returns are tax free.
The 30% income tax relief rate will stay for EIS .
The Seed Enterprise Investment Scheme (SEIS), which invests in smaller start-ups, is an even bigger winner when it comes to tax savings. You receive up to 50% income tax relief when you invest and can also wipeout half your capital gains tax (CGT) bill from the sale of other investments.
Any gains you make in EIS and SEIS are CGT free and if it goes wrong you can also write off losses against your income tax bill in the same tax year.
Susannah Streeter, chief investment strategist at Wealth Club, said: “Such tax reliefs are aimed at compensating experienced investors for the risk they take in investing in small, high-growth companies.
“It’s vital that growing companies can access such streams of funding to give them the opportunity to thrive and help boost the UK economy. But there’s recognition that many fledgling companies will struggle, and by investing in a fund which backs numerous ventures, the risk is spread, given the likelihood that there will be some successes in the pack.”
