DBS

11 If a security is defined as non-readily realisable, this doesn’t mean that secondary markets are not accessible to some debt based securities. Nor does it change the fact that there is a portion of the alternative DBS market where asset backing serves as strong collateral. It’s also worth noting that it’s technically feasible for crowdfunded bonds to be listed on smaller stock exchanges which don’t fall into the categorisation of recognised or designated investment exchanges. These exchanges have their own rules and regulations for listed securities, and tend to be smaller exchanges with less robust rules for listing. However, our research shows that the DBS that this report focuses on are presently entirely unlisted. This means that a variety of risk profiles is on offer – from short term, lower risk renewable energy offerings with robust, fixed income streams generated from guaranteed government feed in tariffs, to higher risk offerings such as those with longer terms and those from SMEs with no assets, but the potential for significant returns. Of course, such diversity leads to a range of risk- adjusted yields in these securities. It is because these bonds and debentures have always been on the FCA designated investment list, that they fall under the more stringent ‘Investment-based Crowdfunding’ regulations, rather than the relatively new, lighter touch ‘Loan-based crowdfunding’ regime which applies to P2P loans. Whilst they are subject to the same regulations and investor protections as equity-based crowdfunding, they’re generally unlisted bonds or corporate debentures and loan notes – fixed, variable, secured, unsecured, transferable, non-transferable. The typical EU debt investment-based crowdfunding model involves a bond at a fixed interest rate 8 . There are some characteristics that are shared by all bonds in the crowdfunding space: All bonds in the crowd-funding space are non-readily realisable securities (NRRS), not listed on a recognised investment exchange and part of the investment-based crowdfunding sector of the market. Whilst there is potential for variation between products, in general, they are not classified as Non Mainstream Pooled Investments (NMPI), for which additional promotional restrictions apply. Some DBS may be transferable and may offer some kind of security. But there are significant differences in these bonds which are brought into play by whether they are a private or public offering or if they are offered through a regulated platform. The web-based platforms which now host much of the debt based security activity are often FCA regulated intermediaries which take on the role of a broker. Some companies may choose to raise funds through bonds, debentures or loan stock directly with investors, and this is still possible, but the regulations that apply to the IFISA exclude these self-promoted offers from IFISA eligibility. SELF-PROMOTED BONDS, LOAN NOTES AND DEBENTURES Companies can raise funds for themselves by issuing and promoting the debt instrument themselves. No regulatory restrictions apply if the investment offering is made to an audience which is limited to the exempt categories of the FSMA 2000 Financial Promotion Order. The exempt categories include high net worth individuals, sophisticated investors, investment professionals, journalists and overseas investors, among others. They are not intended to include inexperienced retail investors. Where the Prospectus Directive rules don’t apply (when the offering is non- transferable securities or the raise is less than €5 million in a 12-month period) and financial promotions exemptions are employed, a company raising finance for itself does not need to be regulated. Consequently, it is not required to provide a full prospectus, and it does not even need to have its marketing material signed off by an authorised firm. Moreover, there is no requirement for that documentation to be fair, clear and not misleading, which is usually stipulated by the FCA for the promotion of investments in securities. So, no authorised entity need be involved, no minimum standard is imposed on promotional materials and no FSCS investment protection is available. The danger is that, either through the naivety of the issuer, which may not have taken any legal advice, or more sinister motives, such offerings may manage to access retail investors, usually via the internet. The massive nature of the internet makes it difficult for the FCA to police and leaves the perilous potential for unadvised vulnerable individuals to invest. As an alternative, the issuer might ask their law firm or offline broker/ promoter to approve its offer document as a financial promotion, confirming the contents are fair, clear and not misleading. This enables the issuer to market the DBS more widely. Occasionally (most often where the raise is above €5 million), the company may even go through the expense of producing a prospectus which will be signed off by the UKLA. However, they do not have to use regulated crowdfunding platforms as marketing intermediaries. Some of the companies that have been involved in self-promoted DBS have been well known brand names such as John “Look at how infrastructure investing has become mainstream over the last 10 years – private company lending is on the same path.” – Matt Taylor, Rockpool