Pre-emption enables existing shareholders of a company to purchase new shares issued by that business before they are offered to new investors. This allows investors to maintain their percentage of equity.
What are pre-emption rights?
This is a right for existing shareholders to have the first refusal on the issue of new shares by a company. These rights protect shareholders against dilution of their shareholdings. Where pre-emption rights apply, shares are offered to holders of relevant shares in proportion to their existing holdings. Crowdcube’s standard requirement for the share class a Company offers to Crowdcube investors is that it is a class of Ordinary Shares with pre-emption rights (which will be held by Crowdcube Nominees, who will organise the availability of those pre-emption rights to investors via the platform) however, every pitch is different so always be sure to read the legal review which will be attached to the email you are sent after the pitch closes to investment.
Who can invest in a pre-emption round?
Only existing shareholders can invest in a pre-emption round. This can include everyday investors to high-net worths, as well as venture capital firms, provided they have invested in the company previously.
You will also need to hold shares with pre-emption rights. Typically, all shares except B investment shares have pre-emption rights. However, you should check the company’s articles of association to confirm this.
Will I always have a chance to exercise my pre-emption rights?
No. The company’s articles of association and company law allow companies to issue shares without going through a pre-emption process in certain circumstances. These include where the majority shareholders (which typically hold 75% of shares) have agreed to waive pre-emption, or where the shares are issued in connection with an employee option scheme.
What happens if I don’t exercise my pre-emption rights?
When a company releases additional equity in the business, this reduces the percentage share of the company owned by an individual investor, as a result of new shares being issued. As new shares are generally issued in order to support a fundraise, existing investors in a company normally find their share diluted by a new fundraise.
Although dilution can be negative for investors, it's important to remember that businesses are raising investment again to continue to grow their business, which in turn could have a positive impact on the value of your shares. Examples of Crowdcube Funded Club businesses that have proceeded with follow-on investment include BrewDog, POD Point, Cauli Rice and Powervault, just to name a few.
What will I have to pay for my shares?
If you invest in a pre-emption round, you will have to pay the same share price that is offered to new investors.
What should I be aware of when investing in a Crowdcube pre-emption pitch?
Offers of investment to a company’s existing shareholders are not subject to the rules around financial promotions that apply to other pitches.
This means that Crowdcube will not approve or carry out any due diligence on pre-emption pitches. Our Due Diligence Charter, therefore, does not apply to pre-emption pitches. As a result, it is very important that you carry out your own due diligence before investing in a pre-emption pitch.