The Financial Ombudsman Service has told Crowdcube to repay a retail investor their £18,000 stake in a London-based Chinese take away start-up.
Zing Zing, which went into liquidation last June, raised £2.7m in two rounds of fundraising.
The unnamed investor placed a £18,000 stake in Zing Zing’s second fundraising round in December 2017.
The Crowdcube pitch stated that the company was raising finance for further expansion.
However, the investor later found it wouldn’t be opening new sites and requested to buy his shares back but was declined.
Ombudsman Ben Waites said that Crowdcube did not tell prospective investors that it knew the company’s expansion plans were unsubstantiated and should pay the investor, named Mr S in this case.
“The pitch didn’t provide sufficient detail to give Mr S a balanced indication of the benefits and the risk involved in Company A,” the decision read.
“As far as Mr S was concerned, Crowdcube had factchecked Company A’s plans for expansion in line with its due diligence charter and it was reasonable for him to believe these included plans for opening new sites.
“There was no reason for him to believe these weren’t sufficiently substantiated or that there was a risk that Company A might not open up any new sites.
“As I’ve said above, I think Mr S was reasonably entitled to conclude that further expansion would involve the opening of new sites. And given everything Crowdcube said it did before approving a pitch, I’m persuaded he thought Crowdcube had satisfied itself about Company A’s plans for further expansion. In my view, Mr S was entitled to know that there was in fact no evidence of any concrete plans for further expansion.
“Mr S would then have been able to decide for himself whether to believe Company A’s aspirational claim knowing that there was, in fact, nothing but its previous expansion to support this. Mr S contacted Company A several times after investing to ask when it would be opening the new sites. And when he found out Company A wasn’t going to open these, he immediately asked it to buy back his shares. So I’m persuaded this was a key reason for him to decide to invest.
“And therefore, I’m satisfied that if Mr S had known that there were in fact no concrete plans for this further expansion, and that as part of Crowdcube’s due diligence, no evidence of these further plans had actually been uncovered, he wouldn’t have invested.”