Some businesses that raise capital through Snowball Effect choose to use a nominee structure. A nominee holds shares on behalf of the investors. The nominee can be useful for both the company and the investors during the capital raising process and on an ongoing basis.
What is a nominee?
A nominee is an entity that is nominated to hold assets on behalf of another entity. In the world of early-stage investing, the nominee's role is to hold shares in a company on behalf of the underlying investors in the business. These types of structures are designed to reduce complexity and make the investment process (and ongoing relationship) easier and simpler for both issuers and investors.
Snowball Effect offers a nominee service for companies that raise capital through the platform. It's not mandatory to use a nominee - the company offering shares will decide whether it prefers to use a nominee before making its offer. The nominee entity we use at this stage is a company called Snowball Nominees Limited. The nominee company is separate from the day to day Snowball Effect business and does not do anything other than act as a nominee.
The Snowball Effect nominee acts as a "bare trustee" so its main role is to hold the shares on behalf of the investors. The nominee is not an active manager and does not give legal advice or investment advice to the underlying shareholders. It does not generally exercise discretion on behalf of the investors, instead the nominee acts as directed by the underlying investor in relation to that investor's shares.
Why do companies use a nominee?
The nominee simplifies some parts of the capital raising process and ongoing investor relations. There are certain legal rules that apply to companies based on the number of recorded shareholders. The nominee technically only counts as one shareholder, so using a nominee can reduce the burden of some of these rules. Companies that use the nominee also value the simplicity that it brings to managing their share register (sometimes called a "cap table"), ongoing investor communications and managing shareholder voting and consents.
What does the nominee do for an investor?
The nominee acts as directed by the underlying investor in relation to that investor's shares. The terms and conditions on which the nominee acts are set out in the nominee deed poll. In summary, the nominee does a range of things in accordance with the instructions of the investors (when needed or instructed to), such as:
The nominee only has the discretion to act on behalf of an investor where that investor has failed to validly respond to a request for direction in respect of their shares.
The nominee does not guarantee the investment or provide investment advice.
How common is this type of structure?
The nominee structure used by Snowball Effect is consistent with best practice around the world for early-stage investing and online private equity investments including the SeedInvest Special Purpose Vehicle arrangements in the USA and the Seedrs Nominee structure in the UK.
Overall, we have found that both companies and investors value the Snowball Effect nominee service and it helps smooth and facilitate easy investment and ongoing investor communications.