Since a lot has happened with Crowdestate in the past few months and due to Estonians having a serious advantage when it comes to accessing information on issues, then I thought I’d take the time to do a short write up for non-Estonian investors involved in CE projects to get a clue of current issues.
To start – several projects funded by CE have failed. It’s yet to be seen how many have been fraud cases or maliciously badly run, but failing projects in itself is not something to cause too much alarm over (because projects can fail). The issue to raise alarm about is the accompanying PR disaster that has seriously shaken investors’ faith in how well CE manages things.
It’s hard to say when exactly things started going a bit wrong but the first big *bang* was the Q-Haus project. Fortunately/unfortunately this case was covered by Estonia’s biggest business newspaper Äripaev. They have a made-up investor (Toomas) who has started to invest into P2P as well. In LHV forums ( a local bank) people were discussing this project – that there is something wrong and the company’s (the Sponsor’s) name had been changed in he business register.
This prompted several investors to (luckily for them) sell. After the name change (CE was unaware of this it seems), a claim for bankruptcy was filed and this info was up on the Äripäev news section *before* any announcements were made on the CE website. This means that investors who either read the LHV forums or the Äripäev news site managed to sell their loan parts before the majority of investors knew anything (and before trading on the CE secondary market was closed).
All other investors who finally got the info through the CE website could no longer do anything. The delay in information being given out was unacceptably long and raised issues on how this info was shared in the LHV forums and CE team knew nothing. By the time the bankruptcy announcement came the business had been cleaned of all assets.
The second issue
Now, this prompted a lot of investors to look deeper into what was going on in their portfolios and this caused a bit of a panic sales push on the secondary market. Another such project which people were talking about on the LHV forums was Baltic Forest. This project has been funded with 10(!!) different rounds and recent updates were not promising. The company was missing payments claiming slight issues while LHV forums once again had discussions of large management issues and likelihood of project failure.
Within not too long official notice was given that the company was indeed in serious trouble and filing for debt management and freezing all payments for at least 6 months. This raised multiple questions on how well CE due diligence works. Turns out that while final rounds were being funded via CE the company’s auditors were already raising alarm bells. At this point info was given that debt management process was started due to failure of securing more working capital from investors, which in all likelihood means anything other than failure is a rather optimistic outlook, especially looking at the total number of millions currently owed.
While all this was happening then Hm Seafood was also struggling for payments and payments were stopped. Info was promised to investors after a meeting and nothing so far.
In the background.
While the business funding issues were piling up, development projects were also piling up problems. Most notably, Tammelehe, for which due diligence issues were once again raised. In the terms for new rounds it was written that the money would be given out provided that previous goals had been achieved. This was brought under question when an investor visited the construction site and took pictures to show an essentially deserted construction site.
Now, the cherry on top of this disaster cake came via Facebook. As in, there is a small group of CE investors who have a FB discussion group and there (and only there!!) Loit (the CEO) wrote, that Tammelehe has been on their radar since spring (!!!) as a potential fraud case. This info was not shared on the website or their blog or newsletter. Investor backlash was rather serious to such a communications blunder an of course this was covered extensively by Äripäev.
Another project that raised red flags was Lepa tee / Metsa tee. Two projects by the same developer (Kristjan Sild). Before funding the first project with the help of CE, he had gone through personal bankruptcy. As stated in the prospect for the first investment, CE team suggested giving him a chance. Key mistake here was that while the first project was already showing issues they allowed a second separate project to be funded, increasing investors’ exposure to his person. Currently a call has gone out to push for bankruptcy.
In the background Latvian projects are also struggling, more info will probably be out about them soon as well.
To sum up
- CE had information about things happening and did -not- share this with investors in a timely manner
- CE had information about things happening and shared this information in a dumb way – through a Facebook group
- CE missed out on key events happening (company names being changed, board members being changed, assets being moved)
- CE failed to check whether previous projects / rounds were going well enough to justify allowing further rounds being funded
As a result:
- investors have justified questions about how due diligence is done at CE
- investors who did not follow information through other channels (such as LHV forums, Facebook, Äripäev) will end up taking losses that active (or informed) investors managed to avoid
- serious loss in trust has occurred
- a very large amount of negative coverage has been given to P2P investments in Estonian media