DBS

12 “Debt crowdfunding is actually preferred by many investors who prefer the steady income available, have the ability to collateralizeobligations andare able to capitalizeon their investment immediately.” – Crowdfund.co Lewis, the Jockey Club or Ecotricity. This is because their established nature and size, and the reputational risk to them of any investor losses, gives comfort to investors. Whilst this introduces regulated entities, the possibility of some recourse to the FSCS and much more stringent controls over the wording of offer documentation and promotional materials, the rest of the relationship with the investor is not subject to regulation. For example, even where the offer document is approved as a financial promotion by an authorised entity, there is no authorised entity which treats the investor as their client – a requirement of crowdfunding platforms facilitating such debt instruments – or with ongoing involvement and monitoring of the investment. Investors therefore have the benefit of additional protections where crowdfunding platforms are used. It also eliminates the possibility of self- promoted DBS being eligible to be held in the new Innovative Finance ISA (IFISA). CROWDFUNDED BONDS In contrast to self-promoted bonds, crowdfunded DBS offers are managed by the authorised platform which arranges them, with the relevant FCA investment-based crowdfunding permission: As securities, bonds have always been regulated so only fully- authorised platforms with permission to ‘arrange deals’ for retail investors can offer investment-based crowdfunding. The role the platform takes can vary, but could include acting as security agent on behalf of investors and receiving, holding and distributing client money. RECENT SELF-PROMOTED BOND FAILURES PROVIDENCE FINANCIAL EXAMPLE 1 825 INVESTORS £10 K AVG INVESTMENT £7-8 M LOST BY INVESTORS Administration - September 2016 SECURED ENERGY BONDS PLC EXAMPLE 2 900 + INVESTORS £7,500 AVG INVESTMENT £7 M + LOST BY INVESTORS Returns stopped in January 2015 Since this FCA authorisation brings the platform into the scope of the Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS), an investor has the right to complain to FOS and/ or claim from the FSCS in the event of an upheld complaint against the platform, should the platform be unable meet any penalty payments, up to £50,000. In order to offer debt based securities, the regulated platforms must ensure that investments are appropriate for their users based on their ability to understand the nature of the investment and the risk. Based on this appropriateness test, an individual is, or isn’t, allowed to invest in crowdfunded bonds. In addition, potential investors must be categorised as high net worth or sophisticated investors, taking regulated advice or those who confirm they will invest less than 10% of their net assets in this type of security. Moreover, client money segregation regulations apply where the platform holds client money. Any FCA approved platform may also be involved in the approval of the promotional documentation, with most prudent platforms very much involved in the sign off process. A 14-day cooling off period is also compulsory by EU law when any entity has not met a client at the point of sale. The FCA has clearly recognised the importance of ongoing involvement of a regulated entity, because it has stipulated that a platform which arranges a crowdfunded DBS deal must treat the investor as their client in order for the bond to be capable of being held in an IFISA.