I’ve been thinking a lot about this secondary market thing Seedrs announced the other day. As described in its ‘beta’ model, Seedrs are dictating prices based on their own valuation model, effectively valuing shares at the price of their most recent raise, assuming the raise took place in the last three years.
In my opinion, this model is wrong on several levels. We’ve seen businesses raise significant funds, blow the lot and wind up in well under 3 years, I’ve been burnt by Hokkei, Delivery Club and Read Bug myself – all raised on Seedrs less than three years ago and are either winding up or have already been dissolved. These are the companies who’ve been relatively honest about their shortcomings or have just completely run out of money very quickly. There are plenty more companies still burning through their money, missing their targets and going nowhere.
By limiting buyers to companies they already hold, I think Seedrs are trying to say that existing investors should have a better view of the company, by having access to the original pitch and the subsequent updates and discussions. For some companies, this might be true, but if you read this blog you’ll know that getting updates from some of the companies I’ve invested in takes a degree of public shaming and even when they do materialise they are often vague. It’s worth noting that these updates are completely unvetted, Seedrs have a big box saying as much at the top of every ‘updates’ page, there is nothing to stop a company adding a shiny gloss to these updates or worse still just plain lying. The only thing any of these crowdfunded companies are obliged to do is file accounts 9 months after their year-end, and we all know a lot can happen in the space of 9 months.
This is simply not enough to form a view on price. If there are questions about the state of the company through a lack of updates or disappointing accounts have been filed then the price should arguably be lower than the Seedrs ‘fair value’ but we won’t get the option to sell at that lower price.
We also have the issue of transparency and privileged information – I was thinking about this issue a few days ago and have asked Seedrs directly to respond to a few questions, since then a similar question has been asked on the Seedrs discussion board. Jeff’s response:
“we can’t (and wouldn’t want to) regulate the communications between investors, but as you say, we can make very clear that it is not regulated, and there will be other things in the relevant documentation to make clear that, if the seller misleads the buyer, the buyer could potentially have a right of action against the seller.”
So they admit that communications between different investors in the companies can vary and they immediately cover themselves by citing the fact that these communications are unregulated. They also state that anyone who might have been misled may have the ability to take action, whilst that may be true I’m not sure it’s the sort of action the average small-scale investor might want to take given the potential cost, complexity and uncertainty around the outcome. There seems to be a disregard for the damage this sort of thing might do to their reputation if and when questionable trades hit the platform, there’s certainly no suggestion that Seedrs would even help out in such a case.
Whilst we’re on the subject of the discussion boards, it’s worth noting that Seedrs’ discussion board is only available to Seedrs investors – There have already been a lot of useful discussions that I think all Seedrs members would benefit from – Let’s see what they think of publishing to a wider audience.
More thoughts soon.