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The entrepreneurs guide to crowdfunding

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A practical introduction to crowdfunding and EIS/ SEIS

A practical introduction to crowdfunding and EIS/ SEIS

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  • 1. 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:  info@sapphirecapitalpartners.co.uk  
  • 2. 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:  info@sapphirecapitalpartners.co.uk  
  • 3. 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:  info@sapphirecapitalpartners.co.uk  
  • 4. 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:  info@sapphirecapitalpartners.co.uk  
  • 5. 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:  info@sapphirecapitalpartners.co.uk   Nov 2013
  • 6. 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:  info@sapphirecapitalpartners.co.uk  
  • 7. 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:  info@sapphirecapitalpartners.co.uk  
  • 8. 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:  info@sapphirecapitalpartners.co.uk  
  • 9. 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:  info@sapphirecapitalpartners.co.uk  
  • 10. 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:  info@sapphirecapitalpartners.co.uk  
  • 11. 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:  info@sapphirecapitalpartners.co.uk  
  • 12. 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:  info@sapphirecapitalpartners.co.uk  
  • 13. 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:  info@sapphirecapitalpartners.co.uk  
  • 14. 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:  info@sapphirecapitalpartners.co.uk  
  • 15. 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:  info@sapphirecapitalpartners.co.uk  
  • 16. 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:  info@sapphirecapitalpartners.co.uk  
  • 17. 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:  info@sapphirecapitalpartners.co.uk