What is a ‘Nominee’
A nominee is a person or firm into whose name securities or other properties are transferred to facilitate transactions, while leaving the customer as the actual owner.
From an investors’ point of view, having a nominee hold the shares on your and other investors’ behalf is beneficial, as a group of small investors can act as protection from dilution of shares. HighCastle nominee structure of deals ensures the pre-emption and tag-along rights protection.
So, Let’s get closer. What is a nominee with HighCastle?
A nominee arrangement is a very common structure whereby the nominee holds legal title to the shares for the benefit of another person. This means that HighCastle is the legal shareholder in the relevant company’s shareholder register, but we hold those shares on behalf of the various individuals who had invested in the company through HighCastle. The effect of this structure is that while HighCastle holds the shares, the full economic interest in them – including the benefits of individual tax reliefs such as SEIS and EIS – are passed through to the underlying investors. This arrangement is very similar to a trustee relationship, as well as to the structures used by stockbrokers and other types of intermediary platform.
Benefits for investors
In the absence of a nominee arrangement, investors would hold the shares in each investee company directly as registered shareholders. It is difficult to overstate the problems this can cause when there is a multitude of investors, each making many small investments. Investors are left to manage the administration of their investments on their own, tracking corporate events, attending meetings and issuing consents where necessary. The bureaucratic hassle alone can be a pain, but the far greater problem is that there is no coordinated effort to monitor and enforce shareholder rights. And without this kind of coordinated effort, minority shareholders can easily fall prey to abusive actions by directors and the majority shareholders.
There are some who argue that this is addressed by investing only in entrepreneurs whom you trust. Unfortunately, that isn’t enough: as time goes by – especially if the company becomes successful – new management and investors may come into place, and they may act far less honestly toward the original shareholders. That’s why angel investors and VCs use and enforce subscription agreements when they make investments: no matter how honest the entrepreneur may be, his or her word simply isn’t enough once the company starts to grow. The worst thing that can happen to an investor is for the company to become hugely profitable, but for the investor not to realise the success because his or her rights weren’t protected along the way. And the risk of that happening is greatest when lots of small shareholders hold shares directly without anyone monitoring and enforcing their rights.
Our nominee structure addresses this. We get rid of the administrative hassle by taking care of all the technical shareholder work while letting investors track and engage with their investments directly through the platform. More importantly, by monitoring the company’s compliance with its subscription agreement, we help ensure that its investors’ rights are protected—so that when the company has a big exit one day, the investors get to realise the full benefit of it.
Benefits for startups
Because we act as nominee for the underlying investors, a startup needs only to deal with us for administrative matters like consents and shareholder votes. This is far easier from an administration perspective than having to send notices to, and even solicit approvals from, hundreds of scattered investors. At the same time, the startup can take full advantage of the invaluable feedback, experience and enthusiasm the investors can offer. So it is the best of both worlds: the administrative work only needs to be done with us, while the substantive support can come from all of the investors.