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News & Media

Mini-Bonds Reviewed by the Financial Conduct Authority

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 kimwales
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TAG Crowdcube, Financial, FSCS, Kim Wales, Mini-bonds, wales capital, WalesCapital

The FCA Publishes UK Equity Crowdfunding Review

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

Financial Conduct Authority Review of Crowdfunding Rules

BY kimwales
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TAG Crowdcube, Financial Conduct Authority, Kim Wales, Seedrs, SyndicateRoom, TrillonFund, uk crowdfunding, wales capital, WalesCapital

A New Bitcoin Exchange and Crowdfunding 2.0

By: Kim Wales (NY) — 01/23/2015

Over the past few weeks Bitcoin value has taken beating and in the past 12 months we’ve been hearing a lot about how Bitcoin’s underlying technology is going to decentralize the central banks monetary system, but also notary services, DNS, authentication, intellectual property ownership and data storage. And with all of the optimism surrounding Bitcoin, Europe’s leading Bitcoin exchange, Bitstamp, was forced to suspend operations, after losing millions of dollars worth of virtual currency due to a breach in its systems in early January 2015.

In a strong and bold move by, Tyler and Cameron Winklevoss believe they have the answer a “fully regulated” Bitcoin exchange based in the United States. It is intended to break through as the frictionless payment method many believe it can be. However, in order to stabilize the value of Bitcoin and get more of the naysayers onboard, Bitcoin must evolve into “an ecosystem that is free of hacking, fraud and security breaches,” wrote Cameron Winklevoss in a blog post announcing the Gemini exchange.

While most of the products and services that were supposed to emerge on top of the bitcoin protocol have yet to see light, there’s actually one application of the bitcoin protocol that has been developed by several bitcoin 2.0 startups: decentralized crowdfunding.

Bitcoin is already driving the early stages of frictionless capitalism. A startup company, BitPesa, has launched a Bitcoin remittances company that intergrates with Kenya’s mobile money system M-Pesa. The pilot involves 15 diaspora originally from Kenya but who lives in London. These individuals regularly send money back to their home countries via traditional remittance mechanism. For the pilot program, the participants will only be able to use the BitPesa platform. This could prove a win for all in reducing transaction fees and placing more money in the pockets of local community people. This could spur business creation, job creation and ultimately decreasing the wealth inequality gap.

“A growing number of US investors, traders, financial institutions and businesses wanted to get involved with bitcoin directly, but had no options other than to trade overseas or sit on the sidelines.” An extended entry “GEMINI SAYS IT’LL HAVE TOP-NOTCH SECURITY AND FDIC INSURANCE!”

Gemini is set to standardize the way in which Bitcoin is traded for buyers and sellers bridging the gap that currently exist in the marketplace while expanding what some platforms powered by blockchain technology remove the need for trusted third party.

The evolution of the crowdfunding has merged with Bitcoin, allowing startups to raise funds by creating their own digital currencies and selling “cryptographic shares” to early backers. This means that investors in crowdfunding campaigns get tokens that represent shares of the startup they support and can actually benefit from the token value appreciation.

In part, revolutionizing the way companies can raise money while at the same time adding a return on the investors holding in Bitcoin is what I find attractive in the model, once implemented properly. The bitcoin community has coined the term “Bitcoin-powered crowdfunding” as real crowdfunding. Enthusiasm around these projects is also tied to the fact that these platforms would be a real source of investment for other types of blockchain-powered applications and would help with the funding of Bitcoin infrastructure.

Platforms like Swarm, Koinify and Lighthouse are three decentralized crowdfunding platforms that have generated a buzz in the Bitcoin community.

As soon as the exchange gains regulatory approval from Benjamin M. Lawsky, the superintendent of New York’s Department of Financial Services, Gemini will proceed forward. A test model of the exchange is already up and running, according to the Times.

It is too early to know Bitcoin’s fate since it is not clear whether a central bank or other regulatory entity will govern it; that final decision may ultimately rule in its success or demise. However, even with uncertainty, venture capitalist are swooning the market and the adoption rate of Bitcoin continues to increase by a number of well-known retailers, including Overstock, Expedia and Dell.  Each started accepting Bitcoin for domestic sales through their websites over the past few months.

One thing is for sure, the capital market is being reformed and this in turn will influence how capital formation will be achieved in the coming years.

BY kimwales
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TAG Bitcoin, Bitcoin Exchange, Crowdfunding NYC, Gemini, jobs act, Kim Wales, WalesCapital, Winklevoos

RBS fosters economic growth with P2P Lending Partnerships

By: Kim Wales (NY) — 01/23/2015

As we eagerly await the Securities and Exchange Commission to release the final rules for Titles III and IV of the Jumpstart Our Business Startups Act (JOBS Act) in the United States that will open the gateway to equity and debt based crowd finance for start up and emerging growth companies.

A continued push to restore confidence, foster transparency and get money into the hands of the most needing enterprises is apparent in the United Kingdom with the Royal Bank of Scotland’s move to partner with online lending marketplaces, Funding Circle and Assetz Capital. On heels of Santander Bank implementing a similar strategy in 2014, these partnerships show an emergence of acceptance that bridges traditional finance with digital debt crowd finance, which is an enticing mechanism to financing small medium enterprises.

Chancellor of the Exchequer, George Osborne, said “It is great to see companies like Funding Circle forging a new partnership with RBS to ensure that small British companies have the best access to funding”.

Peer – to – Peer (P2P) has expanded rapidly after the financial crisis of 2008 as banks scaled back lending – leaving many smaller businesses without any access to finance.

Starting early February, RBS, the state-backed bank partnership with Funding Circle and Assetz Capital will enable it to refer some smaller businesses that it is unable to finance on to the P2P platforms. RBS said its aim is to “expand choice” for customers with loan applications that do not meet the bank’s criteria, by sign-posting them towards the P2P lenders, as well as other alternative sources of finance.

Working hand and glove with RBS, P2P platforms Funding Circle and Assetz Capital will extend bank clients located in Scotland and southwest of England that have been turned down for loans by the bank a new and nimble way to obtain debt financing for their businesses. Clients must indicate on their loan application that their information can be shared with an external third party in order for the bank to bridge the gap in helping the client obtain the financial resources. RBS is expecting to work with up to five such platforms in the coming months.

This new P2P partnerships, which do not involve fees being paid to the bank, follow plans from George Osborne, chancellor, to force banks that reject loan applications from small companies to refer them on to alternative sources of funding. The RBS referral scheme, which plans to expand nationally over the next three months, comes ahead of government plans to make referrals compulsory due to criticism that Britain’s largest banks are failing to provide sufficient credit to the sector. “A key part of our long-term economic plan is to ensure that British businesses are able to access the finance they need to grow and succeed,” said Osborne.

Kudos to the Chancellor, RBS and Santander Bank fostering the economic recovery needed during the most trying periods in history for some generations. The ecosystem to support a capital market that is multi-layered will need to be able to support competing and related interests globally as related to technology, banking facilities, communication, and distribution channels.

It is my belief that the markets that succeed in balancing public and private interests are the markets that will go the furthest in facilitating capital formation through shifting traditional paradigms. Efficient markets need to improve the allocation of capital and enhance long-term economic growth.

BY kimwales
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TAG Crowdfund NYC, funding circle, jobs act, Kim Wales, P2P Lending, RBS, Santander Bank, SEC, WalesCapital

India’s SEBI considers Crowdfunding

By: Kim Wales (NY) — 01/19/2015

India’s SEBI considers crowdfunding as an alternative to helping young budding businesses find funding. There are thirty-eight countries leading the advancement of policy reform to tackle the economic challenges in their homelands through initiatives like crowdfunding. The Jumpstart Our Business Startups Act of 2012 motivated many nations to revisit their securities laws that involves entrepreneurs and small groups of people raising funds for their ventures through various online platforms involving individuals as well as organizations.

In countries like India, the regulatory commission SEBI is evolving guidelines in consultation with government for funding arrangements for start up and emerging growth companies.

At a seminar held by PHD Chamber of Commerce and Industry, SEBI whole-time member Rajeev Agarwal said on Wednesday, “while it is still in a nascent stage in India, compared to large markets like the US, China and the UK, crowd funding is catching up fast especially in the wake of emergence of social media as a key platform for such activities.”

The market regulator had, in July last year, come out with a draft framework on crowdfunding. Under the proposed framework, the issuer entities and their promoters and directors would need to meet ‘fit and proper’ criteria of SEBI, while they can not use multiple platforms to raise such funds within a year, among other provisions that may prove beneficial to economy.

According to SEBI, there is a need for funding for SME through alternative sources as 2008 global financial crisis made it difficult for banks to lend money to the ventures or start-ups, which may have high risk element.

However, SEBI said there is possibility of systemic risk associated with crowd-funding as well as chances that investors could be defrauded.

SEBI whole time member on Wednesday noted that the finance minister made allocation to the extend of Rs 10,000 crores to extend funding facilities for SMEs and other splinter groups in the budget for 2014-15 “which has yet to be utilised for the desired purpose”.

“The government and SEBI are making guidelines for the utilization of this fund, especially for start up entrepreneurs,” Agarwal said.

He also assured that SEBI would continue to protect the retail investors and promote trading in SMEs on the exchanges within the existing guidelines but expressed inabilities of the regulator to broad-base policy measures in this regard.

However, Agarwal said that while the crowdfunding issues has been discussed by the international board of SEBI in detail, India may have to wait longer to bring in guidelines on the same.

“The subject has not even been debated in great details in advance economy such as US and Europe and that India should wait for some time before contemplating regulations and directives on the matter,” Agarwal said.

SEBI

SEBI Consultation Paper

 

BY kimwales
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TAG India, jobs act, Kim Wales, SEBI, wales capital
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