| Informed Funding |
Welcome to the August edition of the Alternative Funding Network News.
We are delighted to welcome Jonathan Segal as a regular contributor to our AFN news and blogs. Jonathan is a lawyer who specialises in Fintech and Alternative Finance, is a frequent public speaker and well known to many of the AFN network. We hope you enjoy his insight!
The AFN and Informed Funding are now gearing up for the iF Funding Fair on the 24th September. Following our successful launch fair at the end of February, we are planning an even bigger event next month! We are already getting many business owners signing up for the event as well as funders who want to be part of the fair either to contribute to seminars, or to have presence at the event via trade stands and sponsorship. If you are also keen to get your product and services in front of a target SME audience, please get in touch [email protected]. We have limited trade stands remaining. More information on the event can be found HERE and below.
To find out more about the AFN membership click HERE or contact the team directly [email protected].
I look forward to meeting you at our Funding Fair in Sept!
Regards
Andy
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Is the world of alternative finance about to go quiet for the summer holidays? That’s anybody’s guess but you might well think so, given the burst of activity during the last week of July. Equity crowdfunding platforms Crowdcube and Seedrs both raised large new funding rounds (£6m and £10m respectively) from big-name strategic investors to accelerate their expansion, while on the P2P lending side Funding Circle revealed plans to float its own fund on the stockmarket that will invest in loans on its UK and US platforms. How much else can there be on the pre-holiday to-do list after that lot?
The stream of announcements and the reports that followed offered some fascinating new information on some of the biggest names in alternative finance. Here are a few of the things that struck me:
Valuations – Crowdcube’s latest funding round values the biggest equity crowdfunding platform at £51m, while Seedrs’ valuation is £30m. These are pretty aggressive numbers. Crowdcube charges 5% on completed deals and has funded just shy of £100m since launch so its latest valuation represents a multiple of about 10x all the revenue it has ever generated. That sounds high but compare it to Funding Circle, which raised money a few months back on a valuation of close to $1bn. Let’s call it £600m for illustrative purposes.
In very rough terms, Funding Circle has lent about £750m to date, taking 1% a year from the lenders and charging borrowers a variable arrangement fee that probably averages out at around 3%-4% overall. That gives a guesstimate for revenues to date of around £35m. At a £600m price tag, that works out at around 17x its historic revenue stream. Why the difference? Simple: Funding Circle specialises in debt, which is a much bigger asset class than equity and so offers the prospect of higher lifetime profits from any investment in it.
And don’t forget Funding Circle has an established foothold in the most valuable market of them all, the US. Those two factors alone are enough to explain the valuation gap – and why Crowdcube and Seedrs remain so keen to grow and establish a sizeable international presence. Hence the need to raise new money.
I wrote in this blog three months ago about a deal on Syndicate Room (where I’m a shareholder) in which a quoted company, Sandal, used SR’s platform to issue shares to the public, and suggested that we could expect to see a lot more deals like this as online platforms started catering for a much wider range of businesses seeking equity funding. You can read that post here.
I also suggested that this might offer a cheaper alternative to the band of smaller City brokerages that specialise in raising money for companies on Aim and the lower end of the Main Market. Sure enough, who should turn up as the leader of Crowdcube’s latest round but Numis, arguably the leading City brokerage specialising in smaller company IPOs. This is a very significant tie-up. Conventional brokerage at the small cap end is starting to meld with online equity crowdfunding and offering a clear view of the shape of things to come.
In the near future, online platforms are going to offer universal access to equity investment in companies at every stage – from Seed EIS opportunities to growth capital rounds, IPOs on Aim and the Main Market and secondary offerings. This is certainly the scenario that Oliver Hemsley, CEO and founder of Numis has in mind. “This investment in Crowdcube will put Numis at the centre of the entire investment chain, from initial start-up capital all the way to IPO,” he said in the release that accompanied the deal. Online platforms would “help the public markets evolve and connect retail investors directly with fast growing businesses”.
Crowdcube will bring Numis hugely enhanced deal flow, and Numis will bring “discipline and reality”, according to Hemsley, to the valuations on Crowdcube, which have at times raised eyebrows. Expect more tie-ups like this between traditional and alternative players, and don’t be surprised if Numis ends up buying a much larger stake in Crowdcube.
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We are delighted to welcome Jonathan Segal as a regular contributor to our AFN news and blogs. Jonathan is a lawyer partner at City law firm Fox Williams who specialises in FinTech and Alternative Finance, is a frequent public speaker and well known to many of the AFN network. We hope you enjoy his insight!
Source:
The Summer Budget 2015 contained two key announcements for the FinTech and alternative finance industries:
the Chancellor confirmed that a new “Innovative Finance ISA” will be introduced from April 2016 for loans arranged via a peer-to-peer (“P2P”) lending platform; and
a public consultation was launched on whether to extend the list of ISA eligible investments to include debt securities and equity offered via a crowdfunding platform.
What is an ISA?
An individual savings account (“ISA”) is a tax efficient “wrapper” around certain investments which means that any interest, dividends or capital gains that arise from those investments are tax-free for the investor. The assets that can be held in ISAs (i.e. qualifying investments) are specified in the Individual Savings Accounts Regulations 1998 and currently consist of (1) cash and (2) stocks and shares. There are limits on how much investors can subscribe to an ISA in each tax year. The annual limit for 2015-16 is £15,240; this can be invested in a stocks and shares ISA, a cash ISA, or a combination of the two.
Innovative Finance ISA
From 6 April 2016 there will be a third type of ISA, the “Innovative Finance ISA”, which will extend the tax advantages of ISAs to loans made through P2P lending platforms. This announcement comes following the conclusion of a consultation on the matter which was announced in the 2014 Budget.
Draft legislation will be published later this year but the key points from the response to the consultation on including P2P loans are as follows:
- Separate ISA: P2P lending has its own risk and reward profile and the government has decided that P2P loans should be included within a separate ISA type – the “Innovative Finance ISA” – to reflect the fact that they are different to other ISA qualifying investments, and will be subject to different rules in relation to withdrawal, transfer and ownership. However, it should also be noted that P2P loans can generally be held within investments that are currently eligible for a stocks and shares ISA, such as investment trusts. It will be interesting to see whether investors will take to the new Innovative Finance ISA or continue invest through more traditional methods.
- Definition of P2P loans: The government intends to use the definition of “relevant agreements” in article 36H of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (i.e. carrying out the activity of “operating an electronic system in relation to lending”) as a general basis for identifying P2P loans that will be eligible for ISA inclusion. This is a wide definition and would make most of the loans on the main P2P platforms eligible for the new ISA type.
- Regulation of P2P loans: The government proposes to make the provision of advice to investors in P2P loans a regulated activity. All firms currently authorised to advise on investments will be eligible to elect to have this authorisation automatically conferred upon them. For the time being, the FCA has not chosen to include P2P lending platforms within the scope of the Financial Services Compensation Scheme (“FSCS”) but this will be reviewed again in 2016.
- Ownership: The ISA rules require that all assets held within ISAs are managed by an ISA manager approved by HMRC. The ISA rules also require that non-cash investments must be legally owned, or co-owned, by the ISA manager or their nominee. This legal ownership requirement is designed to facilitate the acquisition and sale of investments held within the ISA by the ISA manager. As investors enter into loan agreements directly with the borrowers to whom they are lending, P2P loans tend to be legally and beneficially owned by the investor and thus they do not satisfy this requirement. However, the government has recognised that P2P loans can be easily acquired and, where secondary markets exist, marketed and sold by investors themselves via P2P platforms. The legal ownership requirement will therefore not apply to the Innovative Finance ISA and investors will be able to retain the legal ownership of P2P loans wrapped in the Innovative Finance ISA.
- Withdrawals: The current ISA requirements allow an investor to withdraw their ISA investment within 30 days. This will be applied in relation to any cash held in an Innovative Finance ISA but the rules around withdrawals of non-cash investments (i.e. loans) will be matters for the agreed terms and conditions between the lender and the P2P lending platform, rather than the ISA rules. Typically, an investor on one of the larger P2P platforms will be able to utilise its secondary market (assuming there is sufficient liquidity) to exit its portfolio of loans.
- Transfers: The current ISA requirements allow an investor to transfer their ISA investment within 30 days. Again, this will be applied in relation to any cash held in an Innovative Finance ISA but the government has decided not require P2P loans held within ISAs to be transferable.
Consultation on whether to include equity based crowdfunding
The government is also exploring the case for extending the list of ISA qualifying investments to include debt securities and equity investments offered via crowdfunding platforms within the Innovative Finance ISA wrapper. It has launched a consultation on the matter which will run from 8 July 2015 to 30 September 2015.
What does this mean for the alternative finance industry?
By allowing P2P lenders to use the ISA wrapper from 6 April 2016, people who lend their money to others through P2P lending platforms will not be taxed on any interest they make. The government’s response to its consultation is a sensible one and demonstrates a growing acceptance of the alternative finance industry as playing a key role in the growth of the UK’s financial sector.
The proposed extension to the ISA rules that is currently being consulted on could also see the list of ISA qualifying investments widened to include most other investment based crowdfunded products. These developments put P2P lending on a level playing field with other investments, such as banks’ savings products and equity investments, which have traditionally been tax-free when wrapped by an ISA.
It is hoped that these developments will spark a major growth in the crowdfunding sector, diversify the available sources of finance (thereby improving competition in the banking sector) and help crowdfunding become a more mainstream choice for consumers.
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Jonathan Segal, Partner at Fox Williams LLP
Jonathan is a partner in the FinTech and Alternative Finance team at Fox Williams, a City-based Law Firm. He advises clients across the FinTech and Alternative Finance spectrum, from start-ups disrupting existing markets with innovative technology to financial institutions looking to invest in new technology.
He has particular expertise in peer-to-peer and crowdfunding platforms, drawing on his extensive experience in the banking and finance sector gained both in-house at major financial institutions and in private practice. His experience spans a variety of financial products, including loans (both corporate and consumer), real estate and development finance, asset-based lending, receivables financing, asset finance, trade finance, capital markets, derivatives and repos. A regular speaker at industry events both at home and abroad, Jonathan is also heavily involved in next generation disruptive financial products such as virtual currencies (including Bitcoin), blockchain technology and the use of Big Data in financial predictive analytics and disruptive insurance models.
Fox Williams LLP are experts at advising entrepreneurs and FinTech businesses. For more information as to how Fox Williams can help you (including arranging a free consultation) or for further information on the issues discussed in this article, please liaise with either Jonathan Segal or Hannah Sensecall.
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Following the success of our Funding Fair Launch at the end of February, we will be hosting another Funding Fair on the 24th September at the on Southbank. We once again plan to have a full afternoon and evening of informative sessions. This time we will hone in on “What works in new finance for SMEs”
The sessions will be clearly focused on how SMEs can start to think differently about the way they might finance themselves. We will have a deep dive into P2P lending and also Crowd Equity where we will hear from some leading experts and funding providers, as well as hearing from business owners that have raised funds through these channels.
If you are interested in sponsoring the iF Funding Fair, please contact [email protected].
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The funding landscape for growing businesses is changing radically, and provides both opportunity and risk for those seeking to be active in the market. The Alternative Funding Network (AFN) provides its members with intelligence and industry insight on the developing issues that really matter. This is achieved through a mix of exclusive industry seminars, regular commentary, research and secure peer-to-peer networking.
We are pleased to announce that AFN Corporate membership is now complementary for Funders with an Informed Funding microsite.
AFN Membership provides you with the following benefits:
- Free attendance at 6 seminars during the year, chaired by Andy Davis and always featuring leading figures in the industry
- Receipt of Andy’s weekly Blog, exclusive to subscribers to the AFN
- Free receipt of our industry insight reports, built from the intelligence sharing at our seminar series
- A personal listing on our AFN membership network, where members are able to contact each other (if agreed to) on a secure, one-to-one basis
- Free attendance at the bi-annual Informed Funding “Finance Fairs”
- Access to the AFN catalogue of specialist market research and video interviews with industry leaders
If you do not own a microsite, Membership Costs are as follows:
- Corporate Membership is an annual £595+VAT for up to 5 members of your team
- Individual Membership is an annual £295+VAT
