Gain Capital original investor Edison Ventures exits its entire GCAP stake

LeapRate has learned, via filings made with the US Securities and Exchange Commission (SEC), that one of Gain Capital’s first and still largest investors has disposed of its entire stake in the company.

Edison Ventures, a New Jersey-based VC firm, owned 5.41 million Gain Capital (NYSE:GCAP) shares worth about $44.6 million, or about 13.5% of the company. Edison was an original backer of Gain Capital, owner of the brand, first investing back in 2001 at $1.11 per share. Although Gain Capital shares are trading now in the low $8’s, below their December 2010 $9 IPO price, Edison has still clearly done very well on their investment.

Chris SugdenEdison Managing Partner Chris Sugden is still a member of Gain Capital’s board of directors, acting as a member of the Audit Committee and as Chairman of Compensation Committee. His term is up in 2015, at the next General Shareholders Meeting, and we assume that he will step down from the board with his firm no longer owning a stake in Gain.

Edison did not actually sell their Gain Capital shares. Instead, they distributed their 5.41 million GCAP shares directly to their own limited partner investors on a pro rata basis. If you owned 1% of the Edison fund(s) which held the Gain Capital shares, then you’d get ownership of 54,100 Gain shares.

It is not uncommon at all for VC funds to dispose of shares in this fashion. It is often more tax efficient than selling the shares. If a VC firm were to sell the shares that would trigger capital gains taxes for the VC fund itself. They would then distribute the after-tax proceeds to their limited partner investors in the fund – who then themselves might have to pay capital gains taxes.

Gain CapitalAnd given that some LPs are tax exempt or have low tax rate status to begin with (such as University endowment funds and certain pension funds), it is more tax efficient for VCs to distribute the publicly traded shares of a successful investment and let their LP investors handle the sale of the shares themselves, paying low or even no capital gains tax.

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