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The Shift From Debt Based To Equity Based Investing

In this article we examine the shift from debt based to equity based investing, and why this change has come about.

9th October 2009

Up until relatively recently, the UK has been a long way behind their American peers when it comes to investing in equity based businesses. Historically, in the USA, there has been a much greater appetite for investing in equities of non-listed companies.  

In the UK, since the financial crisis, retail investors have been investing ever increasing amounts into equity within non-listed early-stage companies. Research from Beauhurst shows that in 2013 close to £1.5 billion pounds was invested into UK equities. In 2012, this figure was £1.2 billion so year on year this represents around 20% growth.

One of the reasons for an increasing amount of capital being invested into equities within early-stage companies is due to a couple of tax schemes which the Government has introduced. EIS and its little brother SEIS both carry significant tax savings for retail investors. Businesses which qualify for the two different schemes can enable investors to receive up to 50% income tax relief, and exemption from capital gains if the proceeds from such a sale is reinvested into another qualifying SEIS or EIS investment. 

The benefits are such that even if an SEIS or EIS investment goes bust, investors are still able to qualify for loss relief. For savvy investors, it is becoming a no brainer to pump capital into qualifying investments. 

Another reason why equity based crowdfunding has struck a chord with investors is due to them becoming distrustful of banks and other established financial institutions off the back of the fall out from the financial crisis. 

In the run up to the collapse of Lehman Brothers, it became apparent that established financial institutions had become reckless with their behaviour. This was symbolized by banks maintaining weak balance sheets, and by borrowers with poor credit ratings being lent money that they had no possibility of being able to pay back. 

Cumulatively, this has resulted in retail investors seeking new and more trust worthy ways to invest their capital. Whilst there is no doubt that investing in early stage equity companies is incredibly risky, such downsides are countered by potentially huge returns alongside the aforementioned tax breaks. 

One such example which would have resulted for huge returns for investors if it was an equity campaign, would have been Oculus Rift. The virtual reality business was sold to Facebook for $2 billion dollars earlier this year. Prior to this the company ran a Kickstarter campaign which raised $2.4 million. If Oculus Rift would have conducted an equity campaign on the same basis, this would have resulted in a 145x return for investors. 

We should be proud that in the UK we are leading the world within the equity crowdfunding marketplace. Due to arduous regulation equity crowdfunding is not legal in America. 

Crowd2Fund is the UK’s first full service crowdfunding platform. In addition to equity crowdfunding, Crowd2Fund will soon be offering debt, revenue share, rewards, philanthropy and “crowd bond” crowdfunding services.”



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Risk warning

Past performance and forecasts are not reliable indicators of future results. Your capital invested is not covered for compensation in the event of a loss by the FSCS. Tax treatment will depend on the individual circumstances and may be subject to change. Please see our Risk section before making an investment decision.