Published on March 1, 2014
THE ENTREPRENEURS GUIDE TO CROWD FUNDING Everything an entrepreneur needs to know about Crowd Funding www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: email@example.com
TABLE OF CONTENTS 1. Introduction // 3 2. A History of Crowd Funding // 5 3. Peer to Peer Lending // 6 4. Why do Investors like to Lend? // 7 5. Equity Investment // 8-‐11 6. Why do Investors like Crowd Funding? // 12 7. Regulation of Crowd Funding // 13-‐15 8. Typical Success Factors // 16 9. Our services // 17 www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: firstname.lastname@example.org
INTRODUCTION Crowdfunding is defined by the Oxford English Dictionary as Nesta has reported that in 2012, crowdfunding raised over £200m in the UK. It is being hailed as a recent phenomenon but arguably the first crowd funded venture was the East India Company which issued shares in 1600 and was owned by wealthy merchants and aristocrats. Since then businesses have grown by the reinvestment of profits, borrowing of money and by offering and trading shares. Traditionally banks, stock markets and other financial institutions managed this with stock brokers, accountants and IFAs engaging with the public. Then came the crash in 2008 The 2008 crisis changed many things. Not only did interest rates hit the floor, denying savers income , but credit also disappeared along with the trust the general public and business had in the financial establishment. This period also witnessed a change in attitudes to technology. The growing maturity of web based technology and digital communications resulted in new approaches could be taken in the financial services industry. This crisis therefore created a chasm and Crowdfunding created the bridge. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: email@example.com
INTRODUCTION The Crowdfunding revolution meant that people no longer look to the establishment but to each other and the wider business community to ask for financial support to grow business, cultural and charitable efforts. The rapid growth of digital communications and social media created an opportunity to spread a more detailed have been prepared to invest. This guide will detail two key types of Crowdfunding Peer to Peer lending and Equity Crowdfunding and outline how businesses can raise funds and investors can profit. As this is becoming well established the wider financial services are starting to take notice and there is a growing realisation that family offices, hedge funds and even institutions can follow the crowdfunding example. They realise that there is a much wider and competitive investor pool that currently do not invest in their funds and products because they have not been marketed to them. The regulatory barriers and the importance of well selected technology partners will be examined. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: firstname.lastname@example.org
A HISTORY OF CROWDFUNDING FCA Consultation UKCFA Seedrs Crowd Cube Funding Circle Kickstarter 2012 July 2012 Feb 2011 Fall of Lehmans Aug 2010 Nasdaq April 2009 London Stock Exchange Sept 2008 East India Company 1971 1801 1600 www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: email@example.com Nov 2013
PEER TO PEER LENDING This is a way for trading businesses who have a short to medium term funding requirement to borrow from a large number of individuals. The web based platform facilitating this will vet the borrower and set an interest rate. It can be expensive money but it can also be fast. Funding Circle The key player and standard bearer in this sector is Funding Circle. They have helped arrange £161,667,080 of loans since 2010 for business in the UK Businesses in most sectors borrow between £20k and £150k for terms of 24-‐60 months at rates of 7%-‐11%. These figures are based on those listed today and do vary. The loan is offered to borrowers usually for 7 days. To borrow they require that a business: Be established -‐ the average business age is currently 15 years. The minimum is 2 years of accounts Have a good Experian credit score Be in a strong financial position they Review 2 years of trading accounts. Many loans are supported by personal guarantees from the directors of the company Fees Fees are simple at Funding Circle: 1% fee on all lending: you only pay this as a business makes a repayment. And if they miss a repayment, you don't pay a fee. 0.25% sale fee: payable if you sell any of your loans to other investors. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: firstname.lastname@example.org
WHY DO INVESTORS LIKE TO LEND? Why Invest? Average returns are 5.6% after fees and bad debts (which are at 2.2% of loans made across the platform) -‐ This speaks for itself Easy access to your money+ There is a secondary market which allows investors to sell loans to other investors. Control your level of risk. Create a balanced portfolio with loans of varying levels of risk and interest rates to maximize your return. Know that you are supporting small businesses The UK Government are using Funding Circle to Partnership scheme (BFP). IFA or Broker who will have a cost attached. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: email@example.com
EQUITY INVESTMENT For entrepreneurs with an established business that they want to grow or a start up need to get off the ground, Equity Crowdfunding is a way to raise capital by selling a share of the business. The appeal for start up sis that they can take a idea and carryout a proof of concept project while preparing to list. When they then present their business on a crowdfunding platform, investors will not only supply cash but also support and encouragement across a wide geographic area. For growing businesses there is often a period where initial angel investment has been exhausted and the business is not ready for VC involvement or a public listing. Crowdfunding can bridge this gap. The likelihood is that a traditional angel round will have been carried out through a small pool of investors closely linked to the entrepreneur and in a specific geographic area. A crowdfunding raise can free the business to look further afield by fully utilising digital marketing techniques to tell the story of their business and raise investment. This process can also build brand and widen the customer base. For both start ups and growing businesses there are attractive tax schemes. Please read our ebook on SEIS and EIS to find out more. The main exponents in this sector are Seedrs and Crowdcube for start ups and Crowd Valley for established businesses. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: firstname.lastname@example.org
EQUITY INVESTMENT START UPS Seedrs Seedrs allow investors to invest as little as £10 into the startups they choose online and let early-‐stage startups with less than one-‐year of trading history, raise up to £150,000 investment from friends, family and other independent investors in exchange for equity in the business. Seedrs is an "all or nothing" platform where companies do not receive any funding unless they reach their investment target. Seedrs allows a wider base of potential investors, among the mass affluent, access to startup investing -‐ an asset class that was previously only available to high-‐net-‐worth or sophisticated angel investors Seedrs hold a nominee share on behalf of the crowd funding investors. This is to protect their rights but also to ensure a large share register does not put off future VC or if the company becomes the target of an Merger or Acquisition. Seedrs is the first equity crowdfunding platform to receive regulatory approval from a financial regulator the Financial Conduct Authority (FCA, formerly the FSA) www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: email@example.com
EQUITY INVESTMENT START UPS Crowdcube They follow the same basic business model as Seedrs inviting start up or expanding businesses to pitch their idea. Currently they list only 5% of businesses that approach them. Unlike Seedrs, all small investors are listed on the companies share register. Some VCs and other M&A experts have suggested that this might create problems in the future. In February 2013, Crowdcube became authorised by the Financial Conduct Authority (FCA) making it the first UK crowdfunding platform to offer investors the ability to become direct shareholders in UK businesses. Unlike Seedrs investors do not have to qualify as sophisticated investors or high net worth individuals. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: firstname.lastname@example.org
EQUITY INVESTMENT Crowd Valley Crowd Valley is a UK spinout from Grow VC. They have developed a platform that can be used by businesses that want to run their own Crowd Funding project. It opens up the market and allows businesses to offer loans or sell equity. It is a technology solution rather than a full service solution so the business using It will have to give thought to the FCA requirements around the promotion of Investments, the management of their expanded share register and the financial management of the project. Sapphire Capital Partners are well positioned to assist. They will also need to manage the marketing and promotion of the raise. businesses. They can engage directly with their network and build a direct relationship with their share holders. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: email@example.com
WHY DO INVESTORS LIKE CROWDFUNDING? 1. 2. 3. 4. 5. 6. 7. Investors can review a wide range of businesses not usually available through traditional marketing techniques. Transparency of Crowdfunding platforms give access to information across different media salient for investors. They also provide an opportunity to contact business owners before investing. Often an opportunity for investors to be active share holders in advisory or participatory roles within the business. The tax benefits of EIS and SEIS. Opportunity to invest in a businesses before a future sale or IPO. The small entry level allows an investor to build a broad portfolio of investments. The opportunity to be an angel in your armchair. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: firstname.lastname@example.org
REGULATION OF CROWD FUNDING It is important to be aware that Crowdfunding is way of marketing unlisted shares or entering into a loan agreement. These are regulated activities so any organisation wanting to raise funds by these means partner with a regulated platform and take the necessary legal advice. There has been a degree of ambiguity surrounding the regulatory frameworks and specific FCA authorisations that platforms and businesses crowdfunding require. There has also been some confusion around who can invest. The FCA view this as a regulated activity therefore marketing and access to investment material should be limited to sophisticated investors or high net worth individuals. At the end of 2013 the FCA launch a public consultation into crowdfunding and the digital marketing of securities and investments. The following pages outline their recommendations which are expected to be introduced in April 2014. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: email@example.com
REGULATION OF CROWD FUNDING Equity Based Crowdfunding The FCA proposes the following changes: 1. 2. 3. 4. 5. 6. 7. To limit the direct offer financial promotion of unlisted shares or debt securities (including websites) by firms to one or more of the following types of retail client: Those who are self certified or self certify as sophisticated investors; Or those who are certified as high net worth investors; Or those who confirm that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person (i.e. firms will have to engage with financial advisers); Or those who certify that they will not invest more than 10% of their net investment portfolio in unlisted shares or unlisted debt securities (excluding their primary residence, pensions and life cover). where advice is not provided, firms must conduct an appropriateness test before selling clients promotions for unlisted equity or debt securities. The same criteria used for unregulated collective investment schemes will be brought in. Where crowdfunding platforms allow investment in units in unregulated collective investment schemes the existing marketing restrictions will apply. The FCA warns that although certain platforms will simply serve as an introduction to an investment, where they provide a star rating or award or other incentive system, they will need to consider whether they are advising, in which case they will need to apply for permission. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: firstname.lastname@example.org
REGULATION OF CROWD FUNDING Loan Based Crowdfunding 1. The FCA is to begin regulating loan based crowding platforms from 1 April 2014 (when the FCA takes over regulation of consumer credit from the OFT). 2. 3. 4. 5. payment services regulations, thereby requiring authorisation and increasing compliance costs. The FCA proposes minimum prudential requirements (requiring adequate capital buffers) as well as requiring reasonable steps to be taken to ensure that existing loans continue to be managed in the event of platform failure. The current client money rules and financial promotion rules will apply and firms are also subject to the dispute resolution rules customers will be able to complain to the Financial Services Ombudsman although the FSCS is excluded. Companies are subject to a number of FCA reporting requirements, including financial position reports, client money reports, regular reports on investments and complaints reports. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: email@example.com
TYPICAL SUCCESS FACTORS Five Steps to a Successful Crowd Funding Raise: 1) Community: The success of any crowd funded investment round is measured in the amount raised and the quality of investors. At the outset there should be an understanding of the likely profile of investors in a particular fund and marketing should be targeted accordingly. The use of social media and online marketing techniques is crucial as this can effectively create a community around your fund that can be harnessed for future raises or product testing or sales. 2) Opportunity: The best investments are defined by the communities that can be formed behind them. vision of what can be achieved. 3) Technology: Best in interoperability, SEO and other features, the Crowd Valley platform has the flexibility to suit any fund raise. 4 ) Security/ Privacy: Without solid security of information and funds any crowdfunding project will be unattainable. The Crowd Valley platform and systems in place by Sapphire and their Custodians are designed to give confidence to investors and businesses utilising the platform. 5) Compliance: An organisation engaging in a crowdfunding project are offering securitised investment which falls under the FCA responsibility. It is therefore crucial that all communications and activities relating to the fundraise fall under the specific FCA guidelines. www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: firstname.lastname@example.org
OUR SERVICES H SEED EIS SERVICES We help our clients get advance approval for the Seed EIS scheme. MANAGEMENT ASSISTANCE We help our clients with the ongoing management of the company. G START-‐UP FUND RAISING We help our clients raise start-‐ up equity and guide them through the process. CF EIS SERVICES We help our clients go on and raise capital via the EIS scheme. CROWD FUNDING In partnership with Crowd Valley, we offer a full advisory service on setting up and operating a Crowd Funding platform. Learn more about our services request more information www.SapphireCapitalPartners.co.uk Phone: 0870 734 8912 | e-‐mail: email@example.com
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