Revolut facing potential legal action in battle with crowdfunding platform
Revolut is facing potential legal action from a crowdfunding platform after a years-long battle over the sale of its shares by early investors, City AM can reveal.
The row is currently at a flashpoint as the British banking company resists a US private equity investor’s efforts to snap up shares at a heavy discount through start-up investment platform Republic Europe.
Jamba Europe, effectively owned by New York-based HOF Capital, agreed to purchase 10,047.8 Revolut shares from 225 investors for roughly £4.5m in a secondary sale via Republic at the start of November.
However, Revolut moved to block the sale last week by arranging for a group of shareholders to approve a change in its articles of association, Republic alleged in a letter to users on Monday, seen by City AM.
Articles of association are rules that govern how a company is run, agreed by the shareholders and the directors.
Republic claims the change was designed specifically for Jamba and would prohibit legal entities, as opposed to individuals, from buying shares owned by other investors through Republic.
“Having taken legal advice, we believe that both the process and substance of the change were contrary to applicable law and are invalid,” Republic said in the letter.
“Our lawyers have written to Revolut, and we are awaiting a response. We very much hope to be able to reach an amicable solution that allows this transaction to proceed, but we have reserved our rights and will take appropriate action once we have a response from them.”
Shareholders using Republic have accused Jamba of pricing its offer well below the appropriate value of their holdings and taking advantage of a lack of liquidity on the market.
The average price in Jamba’s deal is £447.69 per share, marking a roughly 32 per cent discount compared to an August employee share sale, which landed Revolut a $45bn valuation.
The August sale was brokered by Morgan Stanley and launched at a price of $865.42 per share. Jamba accepted offers up to £549.93 and rejected approaches by 400 investors for 26,439 shares above this price.
Republic and Jamba have given no specific justification for the discount. A source close to Republic said it did the “best it could” on the terms of the offer after Revolut scuppered a string of potential deals in the past.
A Revolut spokesperson commented: “Secondary sales of Revolut shares are only permitted in limited circumstances and with board approval. We remain committed to ensuring longstanding Revolut shareholders are protected from unauthorised attempts to purchase discounted shares.”
Republic declined to comment beyond its communications with shareholders. HOF did not respond to a request for comment.
Revolut vs Republic
Revolut raised £3.8m on the Republic platform, then known as Seedrs, in 2017. The company, just two years old at the time, sold a 1.36 per cent stake to 4,260 crowdfunders at a £276m pre-money valuation.
In a so-called nominee structure, Republic is the legal shareholder in Revolut’s register and holds 436,646 shares on behalf of the crowdfunders. If sold at the August sale price, these shares would be worth some $378m.
Today, 3,471 of the early backers still own shares that could make some millionaires on paper. They can trade among themselves for one week each month on the Republic platform, although low purchase volumes offer investors limited chances to exit their holdings.
A person familiar with the matter said Revolut considers HOF’s takeover of Jamba, just two weeks before launching its offer, to constitute “a complete change of control and identity of Jamba”. The fintech is said to have further concerns over the promotion and pricing of the bid.
According to Companies House documents, Jamba Europe was founded by two individuals and Canada-based Jamba Inc as a limited liability partnership (LLP) in 2013. It was taken over by a fund managed by HOF at the start of October.
Jamba’s founders did not respond to requests for comment.
Republic has argued the offer is allowed under Revolut’s articles as Jamba participated in the 2017 fundraise and holds shares through the platform.
Republic therefore advertised the offer as a “highly unusual opportunity”, adding that it had rejected other proposals from parties that did not already hold Revolut shares.
‘Countless’ bidders
While tensions have spiked in recent weeks, the roots of this dispute go back far beyond Jamba’s deal.
The source close to Republic said that since its 2017 investment, the platform has been approached by “countless” parties to buy shares, while investors have demanded liquidity as Revolut has yet to lay out plans for a possible IPO.
The person said Republic has tried to put together a deal for years but that Revolut has “stymied” each one and been “effectively religious in blocking secondary trades they don’t have control over”, unlike most other companies which have raised money via the platform.
Republic has gone as far as offering Revolut the chance to vet potential buyers, the person added. They said Republic asked Revolut to participate in the August sale but was denied.
“We think it is very disappointing that, at a time when Revolut has facilitated large-scale secondary sales for its founders and employees, it is going to such lengths to block some of its small, early investors from doing the same,” Republic said in its letter on Monday.
Earlier this year, fellow crowdfunding platform Crowdcube agreed an offer worth roughly $370 per share that it later withdrew after Revolut won its UK banking licence in July, according to two people familiar with the matter.
In 2016, Revolut offered 2.39 per cent stake to investors via Crowdcube, raising just over £1m from 433 backers at a £42m pre-money valuation. The 491,870 shares held by the Crowdcube nominee would be worth around $426m if sold at the August sale price.
A Crowdcube spokesperson commented: “We are in regular, positive dialogue with many of our portfolio companies about secondary liquidity for investors, and this remains the case with Revolut.”
Republic under fire
Republic has faced criticism from its own users and the City regulator over its handling of Jamba’s offers.
The platform cancelled Jamba’s original offer in October after pushback from the Financial Conduct Authority (FCA), which ruled it would need specific regulatory approval as a “financial promotion”.
In its second offer letter, approved by the FCA, Republic disclosed both Jamba’s links to HOF and the fact that the private equity firm has a minority shareholding in Republic’s parent company.
A person with knowledge of the situation said Republic was not aware of HOF’s small holding in the parent company and acknowledged it was a mistake not to disclose this fact. Republic’s second promotion said it agreed the offer “on an arms-length basis”. The FCA declined to comment.
The second offer letter removed any mention of the August sale. It also took out references to fears of capital gains tax being raised in the Budget at the end of the month, which Revolut is said to have considered “predatory”.
“Jamba has benefited from those that needed the money,” said one Revolut shareholder, who called the offer “cheeky and opportunistic”.
Republic said in its most recent letter that any completion of Jamba’s purchase will now be delayed.