44 corporate finance roundup
Crowdfunding – the increasingly popular alternative to traditional fundraising
Pulling in a crowd and its money has been simplified by changes in technology and the popularity of social media. Several Internet-based platforms have emerged to cater for those eager to invest in both new and continuing business opportunities in a simplified set up. Crowdcube was the first equity crowdfunding platform in the world when it launched three years ago, and offers potential investors mini-bonds, equity finance or managed-equity funds as sources of alternative finance, writes Roger Gregory, partner, Pitmans LLP
The mini-bond
A mini-bond is a corporate bond issued by a business to raise funds directly from private individuals. Bond holders are paid interest until the bond reaches “maturation“ when they are repaid the full value of their investment and, unlike traditional bonds, mini-bonds are not listed on any stock exchange. Also, in comparison to interest rates on the high street, mini-bonds can offer as much as an 8% return for an investment as little as £60. Commonly, businesses have encouraged investment through the mini-bond by offering more than just a financial return, and incentivised with special rewards during the term of the bond such as vouchers or the business’ products.
As with all investments, mini-bonds do carry risk. Mini-bonds are unsecured debts which mean that if the company suffers insolvency or financial difficulty, the investors could lose all of their money. Also, unlike UK savings accounts, mini- bonds are not protected by the Financial Services Compensation Scheme which provides protection to the first £85,000 on deposit, per account holder, per savings institution. Mini-bonds are also illiquid as they are non-convertible, unlisted and non- transferable and the bond holder is locked in for the duration of the term. Even though mini-bonds are a high-risk proposition, the benefits are hard to ignore for those interested in investing in an alternative finance option.
The market for mini-bonds is booming and Capita Registrars predict that the market could rise to £8 billion by the end of 2017, rising from just £90 million in 2012. With the mini-bonds being brought to the market by a wide range of retailers, such as John Lewis and Hotel Chocolat, the mini-bond is
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a perfect fit for those seeking to raise funds to expand their business and strengthen brand awareness without involving a bank which, in such an adverse lending climate, is extremely welcome to both start-ups and recognised brands alike.
Equity finance
Equity crowdfunding enables entrepreneurs to raise funds through offering shares to investors. A target amount of investment is stated on the platform and, as soon as the target is reached, the shares are issued to the “crowd.“ The investor becomes a direct shareholder and owns a stake in the business. The main advantage of equity finance is that it is not usually repayable, at least in the short or medium-term. Equity investors will typically expect a return over a three-to-eight year period in the form of dividends and from the sale of their share of the business when the business ’exits’ via a sale or flotation. As with mini-bonds, equity finance is not without risk – it is usual to invest in a diversified portfolio to avoid illiquidity, lack of dividends, loss of investment and dilution. However, in comparison to the mini-bond option for prospective investors an equity investment is a higher-risk form of capital and as such a higher return is expected.
Venture capital funds
If neither of the above alternative financing arrangements suit, an entrepreneur or business owner also has the option of venture capital funds. These funds are managed by independent fund managers who select and manage equity investments on behalf of investors.
Venture capital is normally the choice to help build new start-up firms that are often
THE BUSINESS MAGAZINE – THAMES VALLEY – DECEMBER14/JANUARY15
considered to have both high-growth and high-risk potential. Entrepreneurs often turn to venture capitalist funds because their company is so new, unproven and risky that more traditional forms of financing, such as through banks, aren’t readily available. Typically, the investment will have a longer term than equity finance or a mini-bond and at the end of the investment, the fund will sell the shares for (hopefully) significantly more than the initial investment.
Each form of alternative finance, is readily available and easily accessible online which enables anyone to invest alongside professional investors in start-up, early-stage and growth businesses through equity, debt and investment fund options.
Having acted on behalf of clients in respect of each source of alternative financing, I believe that this range of investment options is here to stay and will only continue to become more popular as mainstream banks remain reluctant to lend at this end of the market.
Details:
Roger Gregory 020-7634-4634
rgregory@pitmans.com
Kathryn Lynne 020-7634-4615
klynne@pitmans.com
www.pitmans.com
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