Are there better ways to support small businesses after investors in BrewDog lost everything?

The demise of BrewDog has raised concerns about the value of crowdfunding as an investment strategy and whether there are more effective ways to make money from startups and small businesses

Once the poster child for crowdfunding, BrewDog's demise has left a bitter taste of the dangers associated with supporting smaller businesses.

With the support of 200,000 investors known as EquityPunk, the drinks brand gained popularity after launching in 2007 and raised £75 million.

Investors frequently use crowdfunding to support smaller businesses in addition to investing in the most well-liked funds and stocks.

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Start your trial Brewdog was well-known for its unusual craft beers and grew into bars, but since the pandemic, it has been plagued by financial difficulties and rumors of a bad workplace culture.

The company went into administration this week after failing to turn a profit in recent years and accruing debt. Tilray Brands then purchased the company.

11 pubs and its brewery operations will remain open in the UK as a result of the deal, but 38 bars will close and nearly 500 jobs will be lost.

However, since EquityPunk investors will not receive any money from their crowdfunding investment, they will have more suffering to endure.

"The BrewDogs rescue deal emphasizes the risks of using crowdfunding schemes to invest in companies and how it is very different from buying shares on the stock market," stated Dan Coatsworth, head of markets at AJ Bell.

"Many people overlook the fact that they may be locked into the investment for a long time and may not be aware of what's going on, even though crowdfunding is frequently dressed up with the promise of benefits like money-off discounts. The "

In the instance of BrewDog, Coatsworth emphasized that investors in crowdfunding could only occasionally sell their shares outside of official fundraisers on trading days.

This last occurred on August 31, 2022, which meant that investors who had noticed indications of problems in the company in recent years were powerless to take action unless they could find a private buyer for their stock.

Here are a few different ways to invest in startups and small businesses.

Stock.

Over the past ten years, crowdfunding has become a viable alternative to more conventional methods of investing in businesses.

It allowed unlisted companies to raise money directly from the general public, potentially opening up the world of investing to consumers who might have previously felt excluded.

Investors in crowdfunding should be questioned about the risks of losing everything and the fact that it can be much more difficult to sell out and get your money back than investing in stocks.

Additionally, you could use a stocks and shares ISA to earn profits from stocks without paying taxes.

Coatsworth continued, "There is a clearer exit path when investing in stock market companies. During stock market hours, you can sell to another investor, but there is no assurance that there will always be a buyer who is ready to pay what you want.

"Retail stock market investing differs greatly from crowdfunding. Crowdfunding reduces account transparency and frequently provides little information about a company's most recent trading strengths and weaknesses. In contrast, many stock market companies will provide trading updates once a quarter, and they are required to publish accounts every six months.

Investors in BrewDog's Equity for Punks crowdfunding have lost everything due to the company going into administration prior to Tilray taking over.

Coatsworth emphasizes that investors in quoted companies might have had an opportunity to reduce their losses if they had bailed out after warning signs, "rather than have their hands tied and then lose everything," even though the same would apply to a stock market company going into administration. The "

Additionally, investors could back qualifying Alternative Investment Market shares, which are currently exempt from inheritance tax at 100% after two years. Starting in April 2026, this exemption will drop to 50%, with a 20% rate on the remaining value.

Buying venture capital trusts.

Investing through venture capital trusts (VCTs), enterprise investment schemes (EIS), and seed enterprise investment schemes (SEIS) offers investors ways to offset losses, in contrast to crowdfunding.

Investors who support VCTs, which fund scale-ups in the UK, are eligible for 30% upfront tax relief. Beginning in April, the incentive drops to 20%. There is no tax on any returns.

EIS will continue to receive the 30% income tax relief rate.

When it comes to tax savings, the Seed Enterprise Investment Scheme (SEIS), which makes investments in smaller start-ups, wins even more. Investing can reduce your income tax by up to 50%, and selling other investments can reduce your capital gains tax (CGT) liability by half.

If something goes wrong, you can write off losses against your income tax bill in the same tax year, and any gains you make in EIS and SEIS are free from CGT.

Wealth Club's chief investment strategist, Susannah Streeter, stated: "These tax breaks are intended to make up for the risk that seasoned investors assume when making investments in small, rapidly expanding businesses.

"It's critical that expanding businesses have access to these funding sources so they can prosper and support the UK economy. However, it is acknowledged that many young businesses will face difficulties, and since there is a chance that some will succeed, the risk is distributed by investing in a fund that supports multiple businesses. The "