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The party appears to be over for a certain breed of fundraising model, following the recent intervention by the FCA. Nonetheless, thereremain a number of practical routes open to companies who wish to raise debt funding from the retail market, as discussed further below.
The story so far
For several years now, a combination of light touch regulation and internet-based marketing utilising search engine optimisation has led to a proliferation of high interest, high risk “mini-bond” offers being available online.
These have included everything from:
> genuine, considered fundraising attempts by smaller, entrepreneurial property developers to
> well-meaning but low-quality offerings with insufficient disclosures and risk warnings to
> outright scams
An entirely logical Google search for “Best ISA rates” has had the effect of grouping high risk innovative finance ISA unlisted debt issues with low risk cash ISAs without sufficient distinctions drawn for the benefit of the lay investor. This is an effect that has likely been exploited by less than scrupulous marketeers.
The FCA’s primary weapon in protecting retail investors from losses of the type suffered when London Capital & Finance collapsed, is the financial promotion rules.
The temporary intervention measures the FCA has introduced were born from a sector-wide review of firms which approved financial promotions in relation to mini-bonds.
The measures require unlisted bond and preference share promotions (now grouped under the somewhat pejorative tag of “speculative illiquid securities”):
> to be made solely to those certified as wealthy or sophisticated who pass a preliminary suitability check before promotions can be made
> to include prescribed, prominent risk warnings, including disclosures relating to commissions payable from funds raised
Further analysis of the temporary measures can be found here.
The measures only apply in respect of securities issued to raise funds for the purposes of making third party loans, buying investments or buying or constructing property (save, subject to some finer points, where this property is to be used by the issuer for its business).
Accordingly, it seems likely that Chilango’s ‘Burrito Bond’, which has hit the news recently as the company restructures in its struggle to continue trading, would not have been caught by these restrictions as their bond was issued to fund the general commercial purposes of the group.
The “grown up” approach?
For those issuers wishing to draw a bright line between themselves and the bad actors the FCA’s intervention has targeted, one approach is to seek an official listing of their securities. The legitimacy conferred by listed status is one reason. The very fact that a sober and independent regulatory body has reviewed the primary marketing document for internal consistency and minimum levels of disclosures of salient facts against a set of prescribed criteria, puts a listed offering far ahead of many of the mini-bond promotions which have hitherto littered the internet.
Furthermore, the exposure conferred by a listing, the requirement for an identifying ISIN code and visibility on the chosen Exchange’s website are all things that an upwardly mobile issuing company should be desirous of rather than shy away from.
Listed status is also a gateway to the financial adviser community, many of whom have neither the appetite nor insurance to recommend mini-bonds, and to eligibility for inclusion of the securities issued in SIPP or SSAS pension schemes in addition to the innovative finance ISA.
There are alternatives of course. Issuers can simply target much wealthier investors by setting a minimum investment amount of £100,000 and/or complying with the existing exemptions in the Financial Promotions Order. They can create regulatory oversight in other ways by launching a discretionary management service, with an appropriately authorised manager who selects unlisted debt investments on their behalf.
Those wishing to operate a lending model can even structure an arrangement where they take a potent class of equity kicker in their borrowers, enabling lender and borrower to be classed as belonging to a single group and so to avail themselves of another exemption.
Other more complicated structures are potentially available for property developers wishing to finance the purchase of a single multi-occupancy property or of multiple ‘buy to let’ residential properties or units on an industrial estate within a single development.
Clients of this firm have been cautiously optimistic that the FCA’s intervention will broadly achieve its aim and, in doing so, allow the better quality retail debt opportunities to come to the fore.