Foreign Affairs — 02/12/2015
Industry thought leaders convened in NY for the Foreign Affairs: Cryptocurrency Policy Reform conference. The discussions included three pillars:
By: Kim Wales (NY) — 02/03/2015
A review of the regulatory regime for crowdfunding and the promotion of non-readily realizable securities by other media were published today by the Financial Conduct Authority. One area focus was of focus is on mini-bonds, which is a type of debt security, typically issued by small businesses. “Such securities run for around three to five years, in general, and offer an interest rate of between 6% and 8% a year. Such businesses may have found it difficult to secure a loan from a bank or could be start-up companies looking for funding.”
However, a ‘warning label’ should come with the buy and sell of the mini-bonds, they are a way for companies to bypass the City and borrow money directly from private investors, and have been issued by firms ranging from John Lewis to Hotel Chocolat.
The FCA review says “it is important for prospective investors to understand the risks. Mini-bonds are illiquid and can be high risk, as the failure rate of small businesses is high. There is no protection from the Financial Services Compensation Scheme (FSCS) if the issuer fails. Firms promoting these securities to the public must make the risks clear to prospective investors.”
Sometimes the return can be really high if the investor elects to take their return in the form of goods or services. For example, upmarket coffee shop chain Taylor St Baristas, which launched its mini-bond in November 2014, gave investors the choice of an 8% cash return or 12% in the form of store credit, which would reportedly add up to about 30 coffees a year for an investment of £500.
Other well-known names that have launched mini-bonds include Hugh Fearnley-Whittingstall’s restaurant and food business, River Cottage, which was offering interest of 7% a year plus 10% off at its outlets, and retailer Hotel Chocolat, whose most recent bond let investors choose between an annual return of 7.25% in the form of in-store credit, or 7.33% in the form of a monthly box of chocolates.
Many of the bonds have been launched via Crowdcube, a crowdfunding websites, and successfully raised £1m in less than 36 hours for River Cottage.
Just days ago it was revealed that almost 1,000 small investors who put a total of £7.5m into mini-bonds known as “secured energy bonds” are unlikely to see a penny of their money back after it emerged the cash was siphoned off to an Australian company that later went bust.
The FCA said it had reviewed the promotions of a number of mini-bonds on crowdfunding platforms and via direct advertising, and had a number of concerns.
It added: “Firms are failing to make clear that mini-bonds are investments that place investors’ capital at risk, and are not deposit-based or capital-protected products.”
The regulator also said it was misleading to compare the interest rates on mini-bonds with those available from traditional savings accounts, where people’s money was not at risk.
The FCA added that while mini-bonds were sometimes put into the same category as retail bonds, which are another way of raising money from private investors, there were important differences. For example, while investors can usually buy and sell retail bonds, mini-bonds are generally not traded, so investors’ money is effectively locked in until maturity, as the mini-bond cannot be sold on before the end of its term. “This should be made clear to prospective investors,” said the FCA.
By: Kim Wales (NY) — 02/03/2015
The Financial Conduct Authority publishes its crowdfunding review. Turbulence in the markets spawned a new industry for capital markets in 2012 called Equity crowdfunding, which as of now has transacted £67m of equity investment in the United Kingdom, according to statistics from AltFi, a data provider. TrillionFund, Crowdcube, Seedrs and SyndicateRoom represents the largest platforms that are etching their footprint in the landscape, as such 35 smaller start-up platforms are following their path and up to 10 of those are in the process of being evaluated for licenses. Early on the Financial Conduct Authority recognized the vital importance of facilitating capital formation in markets that were effectively broken or inefficient.
Unlike sites such as Kickstarter, where donors contribute money to projects often in exchange for token “rewards”, equity crowdfunding allows investors to buy shares in the companies. This can be a little more risky than another blossoming area, peer-to-peer lending which shortens the time line for the lenders to receive a return on investment given the nature of the risk profiles of the borrowers. A study last year indicated that some 62 per cent of funders on equity crowdfunding sites have no experience of early-stage investment which heightens the regulators caution towards investor protection rules.
“A light touch approach” was the thesis behind the initially published rules in March 2014 and was broadly embraced by most industry participants. In stark contrast to the United States, the FCA made a conscious decision to allow the nascent industry to grow and evolve without unbearable rules. The FCA affirmed, “they see no need to alter course” as things as the marketplace is evolving. This publication provides a complete high level overview to the UK market with the expectation being that a more complete review will be conducted in 2016.
The FCA is keen to promote innovative financial technology as well as individual investing in the stock markets, and is understood not to want to kill off the fledgling sector. However, the FCA has warned investors “it is very likely you will lose all your money” in equity crowdfunding, which involves taking stakes in unlisted companies that are often in their early stages.
Some companies failed to meet capital requirements last year, while others made misleading claims that they were placing retail investors on an equal footing with venture capitalists, the FCA said.
“This becomes significant if venture capitalists are able to profit from successful investment opportunities but crowdfunding investors find, when an investment succeeds, that equity dilution means they do not share in the profits to the same extent,” said the FCA.
To read the published review click here.
Financial Conduct Authority Review of Crowdfunding Rules
