There’s no fun in Crowd-funding

When Anspach & Hobday and Redemption announced crowd-funding programmes, the trickle that began a few years ago with Brewdog and Camden has turned into a tsunami and the Editor asked me to write this article. Apologies, as various work commitments have delayed its appearance but the underlying message that the situation is extremely unhealthy and a serious risk to a potential investor’s wealth has not changed.

In August, when the article was commissioned, there were five separate breweries raising funds on Crowdcube, including Utopian craft lager, who were seeking money before they have even brewed, which is reminiscent of the infamous prospectus from the South Sea bubble “for carrying on an undertaking of great advantage, but nobody to know what it is”.

In mid-September there were three companies including Brewdog, who have been doing it in-house for years, and Play Brew, who I have never heard of and are basing their beers on 1980’s arcade games, which sounds like an idea Alan Partridge would leave on his Dictaphone. And that doesn’t even include Anspach.

Clearly something is going on. However, I feel that there are serious problems with crowd-funding, and Crowdcube, and specific issues for the brewing industry, which means any potential investors should run a mile and keep their money firmly in their pocket.

The general issues:

1. CrowdCube does not take funds from the US. This is because Securities Law is a lot stricter in the States, and crucially the penalties (jail), for breaking it, are a lot stiffer. If they took US funds then they would have to follow stricter laws which protect investors’ rights.

The clear analogy for beer is deliberately using cheaper, inferior ingredients from a regulatory regime that has lower food and drink standards. It is absolutely damning that these breweries are prepared to raise funds via an entity that is not able to operate in the richest country in the world, with the most developed and sophisticated equity markets, as their investor protection standards aren’t high enough.

2. It is also wrong that Crowdcube often market small-lot investments (typically £10 -£10,000) as “B Investment shares”, when they do not have crucial features such as pre-emption rights. A brewing example was provided by BrewDog  (https://www.brewdog.com/GM290317LTR_Chairman-BrewDog-PLC_13-MAR-17.2.pdf), in which they did not offer the B Ordinary Share holders the same opportunity to participate, that they gave to their new investor. Given that many of these “B Investment shares” are marketed by CrowdCube on the basis of product discounts, I would say that they are actually mutually beneficial customer loyalty schemes, rather than equity. I wrote about this in an earlier blog  (http://beerinsider.com/lack-of-equity-at-brewdog/) and specially raised the point with the FCA when they sought feedback on the sector.

3. I have particular issues with the low standard of due diligence that crowd-funding platforms undertake. This blog, http://fantasyequitycrowdfunding.blogspot.com/, provides many examples. A lot of crowd-funding raisers don’t have the financial knowledge for some of the pitches they are making, but it is up to the issuing platform to then provide it.

4. The regulators are a long way behind crowd-funding as it is relatively new. The FCA have released various Interim Statements, and engaged in consultations, but have yet to catch up with the technological innovation. These issues are magnified by the EIS/SEIS tax breaks, which do incentive small business creation, but are also relatively new. Ultimately here, losses will be borne by the Government.

5. “A recession reveals what an auditor cannot “. Crowd-funding has only existed in a period of economic growth in both the US and the UK. It has only been around in the UK during a time of extreme monetary stimulus. Asset markets, particularly shares in the US, and property in the UK have only been in a bull market during that time. It is prudent to be extremely wary of the concept until it has faced monetary tightening and has survived a completed economic and also asset price cycle.

6. Crowd-funding is therefore a volatile, risky investment, with few safe-guards. These are not for casual, inexperienced investors. Yet these are precisely the class targeted, with very low nominal amounts and ‘special offers’.

There are also beer-specific issues:

A. The sheer number of equity issues to fund expansion should lead to warning signals about future over-capacity. Each brewer is acting as if the marker was static and they were the only ones raising capital for expansion.  It may be correct to anticipate sales increases if only one brewer raises production but clearly if every brewer does it then the industry will experience over-supply.  On top of this, both Four Pure and Beavertown have been taken over by or received funds from macro brewers who will be increasing capacity dramatically.

B. The questionable quality of some of the companies that are crowd-funding! Redemption is a fantastic brewery. Others not so.

C. In January 2016, Redchurch raised £500k on Crowdcube, on a valuation of £2.2 million, based upon their sales and profit forecasts. However, they missed the sales figures by approximately 50%, so that the prediction of a £1k profit turned into a £170k loss. Fourteen months later they were back for another £400k, but ludicrously the valuation was now £5 million, or more than double.  It is absurd that a business can spectacularly miss its targets and yet double in value.  (http://beerinsider.com/lets-rake-over-the-take-overs/)

D. Wild Beer’s first set of results after their Crowdcube campaign, for the year ending July 2017, were released. This blog gives a summary: (http://fantasyequitycrowdfunding.blogspot.com/search?q=+wild+beer). A small predicted profit turned into a loss of £370k, with sales disappointing by £400k. The results were poor, but good businesses can disappoint and growing ones post losses. What is truly shocking is that they pitched on Crowdcube in March 2017, so had completed nine months of the year, and already knew 75% of the numbers, which makes the margin of error staggering.

Crowd-funding is a Wild West of investment with many questionable practices. It is most definitely not for the novice investor that it targets. The sheer volume of craft beer offerings almost assures over-capacity, even if the issuers were limited to quality brewers, which they are not.

Hence, a basket of investments in all these issues is guaranteed to lose money. It’s possible that a single company might be so good that it produces decent returns, but if that were the case, why are they using such a fringe platform to raise funds when there are so many other ways to bring in money? I would advise beer-lovers to follow their head, and not their heart, and avoid all brewery crowd-funding.

Reporting from the front-line – Amateur Drinker manages to get along to all the beer things you’d like to but couldn’t. If you see this man and are tempted to buy him a drink think of the consequences. He also wants to protect your interests.