Investors don’t like your company? Try crowdfunding

Investors who had been swindled out of their money by some dodgy financial advisor used to be able to call up Rebus Group, a claims management company established in 2010 and led by Adrian Cox, the former European CEO of Ask Jeeves.

The eventual collapse of the business in January this year might not have attracted much attention, except it had raised £800,000 just ten months earlier on the crowdfunding site Crowdcube. The FT called it the “largest crowdfunded failure” in the UK so far:

A claims management group that targeted investors who had been mis-sold financial products has gone into administration, in the biggest failure to date of a UK crowdfunded company.

Rebus Group raised £816,790 via crowdfunding platform Crowdcube last year to fund an expansion that aimed to deliver investor returns of up to 10 times within three years.

Now companies fail all the time and caveat emptor applies to investors on crowdfunding sites as much as it does to investors anywhere else. But the administrator’s report, published on Saturday and first highlighted by Rob Murray Brown on his blog, might make you wonder if Rebus and Crowdcube presented too rosy a picture of the company’s health.

Here are the salient paragraphs from the report, which you can read in full over at Companies House:

Rebus was burning cash, needed new investment in May 2014 and decided to call in ReSolve, which offers “advice to businesses that have lost their way,” according to its website. Unfortunately, no-one was interested. So Rebus found a bunch of people on Crowdcube to give them the money instead. (Adrian Cox, who was chairman of Rebus, disputed this via email. He said the company “did not fail in raising funds”, but instead opted on a capital injection from existing shareholders. He said the above entry in the administrator’s report was “not helpful”.)

Take a look at the sales material used on Crowdcube to tout this struggling company.

Perhaps our eyes are failing us, but we were unable to find mention of the fact that Rebus had already tried and failed to drum up interest elsewhere. What’s more, you would be hard pressed to find an upfront discussion about the difficulty Rebus was having in “generating the required cash to continue trade” as a result of the long amount of time it took to get paid on recoveries, as noted by the administrator above. There is one short line that says simply: “Rebus cash flow fluctuates with the timing of success fees.”

The materials don’t say the funds were needed to prop up a flagging business. Instead, under “Use of funds”, you find things like “Human Resource Capital” — hiring people — and driving “continual system improvements to drive efficiencies”.

Investors weren’t told that one of the Rebus people listed on Crowdcube had been banned by the FSA. As per The Times:

Richard Rhys was described by Rebus on Crowdcube as a senior board adviser and a driving force behind the company. In 2012 the Financial Services Authority banned Mr Rhys, 41, over his involvement in a failed investment scheme that was unlawfully promoted. The FSA said that Mr Rhys lacked “competence and capability”.

They were, however, provided with a promotional video and this one-page “financial snapshot”, which predicts positive operating cashflow in the year following the fundraise and pre-tax profits of £385,000 (click to enlarge):

And they went for it. By April 2015, Rebus had raised £800,000, more than the £600,000 it had originally sought in March. Over 100 people put money in, with investments ranging from £5,000 to as much as £135,000.

Chairman Adrian Cox said Rebus was “totally transparent with prospective investors”. In the end, more than 90% of the investors were “clients or existing shareholders who knew the business in great detail,” he said.

“A summary business plan was available on the Crowdcube site and a 40 page detailed business plan was provided to those prospective investors who were able to verify they were legitimate investors,” he said, adding that there were “challenging” discussions about the investment on Crowdcube’s forum. “No investor could argue that they were not fully availed of all the issues and facts.”

Luke Lang, co-founder and chief marketing officer of Crowdcube, said it is normal for companies to look at multiple sources of funding when trying to raise money. He added that Crowdcube doesn’t ask companies to disclose previous fundraising efforts and that Rebus had a previous relationship with ReSolve, which is why they were initially involved. “It wouldn’t have surprised me or concerned me that Rebus had discussions to raise finance that had proven to be unsuccessful,” he said.

Following the Rebus crowdfunding, Crowdcube had “reviewed our systems” to ensure that company advisors, as well as directors, were subjects to background checks, said Lang.

“I think the pitch was fair, clear and not misleading,” he added. “Investors had the information that they needed.”

The marketing materials said Rebus was intending to raise another £1m in September 2015 “to continue the business expansion plans” — the administrator’s report says that by November they were trying to sell the company.

Again from the administrator’s report:

When it went into administration in January 2016, Rebus Group’s finances were a mess. It had net liabilities of £4.1m, up from £2.4m at around the time of the crowdfunding. The £324,000 of gross profit on its P+L was dwarfed by administrative expenses of £1.1m:

According to the administrator’s report, the most that can be salvaged from the company is a sale of property to account for as much as possible of the unpaid wages and holiday pay of former employees. ReSolve did not immediately return a request for comment.

Of course, none of the investors from Crowdcube will see a penny. But then again, they knew what they were getting themselves in for.

Update: Comment from Adrian Cox added.