Handling investments through crowdfunding platforms can already be a complex financial strategy, with returns that vary greatly and risks that demand serious due diligence. Add divorce into the equation, and the challenges become even more layered. When a couple separates, all shared assets need to be considered carefully, and this includes the less tangible, sometimes illiquid assets such as crowd-funded investments. From equity crowdfunding in startups to peer-to-peer lending and real estate crowdfunding ventures, each investment type requires nuanced analysis to determine ownership, value and the appropriate solution for division.
Navigating this process correctly requires a combination of legal insight, financial savvy and a clear understanding of the crowd-funded investments in question. Below, we’ll walk through the essentials of managing these assets during a divorce, offering practical and strategic considerations for those going through such a transition.
Understanding the nature of the investments
To begin, it’s crucial to clearly identify and categorise every investment that falls under the crowd-funded umbrella. Crowdfunding platforms offer a wide range of financial products. Some offer equity in startups, giving backers shares in a private company. Others operate as loan platforms, where individuals lend money to others or to small businesses expecting interest in return. There are also platforms enabling fractional investment in property portfolios.
Each variety has different implications during a divorce, especially when it comes to valuation and liquidity. Understanding which category the investment falls under can help determine the next steps in legal and financial discussions. Equity securities in a private company may have restrictions on transfer or resale, while peer-to-peer lending platforms may have ongoing repayment schedules affecting future income. Identifying these factors helps build a clearer picture of the total marital asset pool.
Determining whether the investments are jointly owned
Ownership plays a critical role during asset division. Often during a marriage, one partner manages financial affairs or makes investment decisions on behalf of both parties. However, the name on the investment account or the platform registration is not always the sole determiner of ownership. If crowd-funded investments were purchased with shared funds, or if they grew in value during the course of the marriage, they may be considered matrimonial assets, even if registered under one party’s name.
Courts in England and Wales typically consider assets acquired during the marriage as jointly held for purposes of division, unless there’s an existing prenuptial agreement or the asset can be reasonably excluded due to being premarital or inherited. For this reason, even if you were not the investor in the couple, you may have a claim to the value or income derived from the crowd-funded investments.
Valuing crowd-funded investments accurately
Unlike traditional shares traded on public exchanges, the value of crowd-funded investments is not always readily available or easily determined. This is particularly true in the case of equity in startups, where valuation depends on the latest fundraising round or an internal estimate.
For the purposes of divorce proceedings, a valuation expert may need to be involved. Their role would be to assess market value based on any available financial statements, comparable company data or recent financing events. Peer-to-peer lending portfolios might be easier to value if the loan terms are fixed and default risk is low. However, if a platform has experienced high failure rates or economic conditions have changed, expected returns could be lower than stated and will need to be adjusted.
Liquidity is another crucial consideration. Some assets may require long holding periods or may not be liquidated without triggering penalties. A clear understanding of these constraints is necessary when determining whether an asset should stay with one party or whether compensation should be made through other means.
Disclosing all investments in divorce documentation
Transparency is a key principle in divorce settlements. All assets, including crowd-funded investments regardless of their size or perceived importance, must be disclosed in the Form E document in England and Wales. Failure to do so can have serious legal consequences, including potential reversal of settlements or the imposition of penalties.
Sometimes, these investments are small in amount or spread across several platforms, making them easy to overlook either accidentally or intentionally. However, non-disclosure is not a viable strategy, even if the investment appears to be loss-making. It’s essential to list each holding, including relevant account details, amounts invested, current valuations (if available), platform names and any income or dividends received.
Platform records, emails confirming investment, and bank statements showing transfers to platforms can be used to track and support the documentation. If unsure about certain investments, a forensic accountant or financial adviser may assist in uncovering any overlooked assets.
Negotiating the distribution of crowd-funded investments
Assuming full disclosure has occurred and valuation information is available, the next step typically involves negotiating how to divide or retain the investments. This may be done through solicitors or mediators, or decided by a judge if the parties cannot reach a resolution themselves.
In many divorces, there is an interest in preventing the forced liquidation of certain assets, especially if those assets are seen as speculative or likely to increase in value significantly in the future. For instance, a startup equity investment that has not yet matured might one day become highly valuable. Similarly, peer-to-peer loans may not yet have reached their full repayment schedule.
In such circumstances, a common approach is to offset the value of the investment by adjusting the division of other assets. For example, one partner may choose to retain the crowd-funded asset in exchange for relinquishing claim to a portion of savings, property equity or pensions. Ensuring a fair overall division is the goal, and this can be achieved in several creative ways, but only through accurate data on current and projected values.
Considering joint versus individual platform accounts
Crowdfunding platforms generally do not offer joint investment accounts. Even when both parties contribute, the account is likely set up in one individual’s name. This setup requires additional attention during divorce proceedings, particularly if one party owns the account but both made financial contributions.
Splitting investments in such cases might be difficult or impossible without the consent of the platform or the cooperation of the owning party. Fortunately, courts can issue orders requiring the account-holder to act in accordance with settlement terms, which may include transferring the proceeds from future windfall events or distributing income over time.
It may also be necessary to approach crowdfunding platforms directly to understand their process around asset transfer, rights of interest and nominee structures. Some platforms hold shares via a nominee account, limiting the legal ownership rights of the actual investor and potentially complicating distribution. In such cases, compensation may be simpler through offset rather than attempting to physically share the asset.
Tax obligations and considerations
Dividing assets in a divorce typically does not trigger capital gains tax immediately, provided that the transaction occurs within the tax year of separation. However, crowd-funded investments add complexity. If a couple delays making divisions or liquidates investments at a later date, CGT obligations may apply.
Particularly with equity investments that have appreciated significantly, couples should work with accountants to structure the division in a tax-efficient way. Transfers between spouses are generally tax-free, but selling a stake or receiving a cash settlement later may realise a gain subject to taxation.
Further, some investments placed in Individual Savings Accounts (ISAs) may require additional care. Transfers may breach ISA subscription limits or result in loss of tax advantages, so professional advice is recommended before making changes to such arrangements.
Protecting future windfalls and income streams
A critical point with crowd-funded investments is the potential for delayed windfalls. A small equity stake in a startup might be worth little today but could generate a major payout through acquisition or an IPO several years later. Likewise, earnings from ongoing lending agreements may accumulate over time.
During the divorce proceedings, settlement agreements should include clauses that address future events such as distributions, repayments or liquidations. These are often known as contingent asset clauses and can protect both parties in the event of future financial developments. Without them, one party might unfairly benefit from an investment made jointly or with shared money.
Agreements can state that any proceeds from a specific investment should be split according to a defined formula or that one party should provide the other with a portion of proceeds above a certain threshold. Courts can enforce such clauses, but they need to be detailed and explicit in language to avoid uncertainty and later disputes.
Professional help and financial mediation
Given the complexity and uniqueness of each couple’s financial profile, divorces involving crowdfunding portfolios especially benefit from third-party support. Engaging a financial mediator with experience in alternative investments or a solicitor with insight into fintech and new asset classes can make the process more efficient and less antagonistic.
When spouses are able to negotiate amicably, financial mediation offers a constructive environment in which to discuss asset division without the adversarial aspects of litigation. The mediator can help both parties understand the potential implications of retaining versus disposing of certain assets, and encourage compromise where appropriate.
Forensic accountants can also play a role in tracing hidden investments or assessing fairness in the distribution process. This is particularly useful if one party handled most of the investing and the other is at a knowledge disadvantage.
Staying informed for the future
Post-divorce, individuals often find themselves redefining their financial priorities and investment strategies. For those with remaining crowd-funded assets, it’s important to stay active in reviewing performance, platform developments and emerging opportunities. Some might choose to divest gradually, while others might be interested in increasing their exposure to alternative funding platforms.
It’s helpful to maintain clear records, understand exit mechanisms, and revisit the underlying risks of each holding periodically. Divorce also presents an opportunity to reassess goals, engage in financial planning and invest anew with individual risk tolerance and timelines in mind.
Conclusion
Separating finances is difficult under any circumstance, but includes additional complexity when non-traditional assets are involved. In this day and age, crowd-funded investments represent a growing portion of the average person’s portfolio and cannot be ignored during divorce proceedings.
Tackling these investments requires clear thinking, structured documentation, collaboration with financial experts, and ideally a cooperative mindset between former partners. Whether these investments are equity stakes in a promising start-up or long-term peer-to-peer loans, careful planning can help ensure that the outcome is both equitable and legally sound. Where necessary, legal and financial guidance should be sought early to give both parties confidence in navigating an evolving and often poorly understood asset class.