I’m often asked what’s hot in the world of FinTech, and my current answer would be mini-bonds. This latest FinTech craze isn’t just the preserve of retail brands such as BrewDog or Hotel Chocolat; mini-bonds are increasingly being issued by finance companies as a way of raising lending capital.
Such companies have recently been using peer-to-peer lending platforms to borrow funds, as obtaining finance from traditional banks and debt funds is often difficult, particularly for younger businesses.
I think this trend is mainly the result of a “Dear CEO” letter which was issued by the Financial Conduct Authority in February this year to all P2P lending platforms. The gist of the letter was this:
- If a lending business borrows through a P2P platform and then on-lends such monies to its customers, it may be performing the regulated activity of accepting deposits; on the assumption that the lending business is not a bank, which it invariably is not, it would therefore be breaching FCA regulations.
- Where a P2P platform facilitates such lending to an unauthorised deposit taker, the FCA takes the view that the platform operator would not be acting consistently with our expectations for regulated firms and may be in breach of certain regulatory requirements; in particular, Principle 6 (Treating Customers Fairly) and threshold conditions 2E (Suitability) and 2F (Business Model).
Clearly the FCA doesn’t approve of this kind of wholesale funding activity!
In order to avoid any regulatory issues associated with deposit taking – there is an exemption relating to the issuance of certain types of debt securities – a number of finance providers have opted to use mini-bonds instead as a way of raising lending capital.
Mini-bonds have, in recent years, become a popular investment-based crowdfunding product, predominantly aimed at retail investors. There a number of apparent advantages in issuing mini-bonds, as follows.
Less onerous regulations
Mini-bonds are often structured so that they fall outside the requirements of the EU prospectus regime and so do not require the same high level of disclosure as retail and wholesale bonds.
Retail bonds are a special type of corporate bond aimed at retail investors which are tradeable on the stock market. Mini-bonds, however, are an illiquid product and are not traded on a stock market. They are therefore subject to less regulation and, as a result, where relatively small amounts are being raised, their issue can be reasonably time and cost-effective, particularly in comparison to retail bonds.
Rise of bond issuance platforms
Due to the rise of bond issuance platforms such as CrowdCube or Code Investing, it has also become far easier for companies to issue mini-bonds. Such platforms will arrange the transaction, assist with marketing it to investors and arrange to receive the bond proceeds. They will also deal with the whole investor application process whether online and/or in paper format.
Typically, we have seen the coupons offered on mini-bonds fall in the range of 8% to 12% per annum. Mini-bonds allow for issuers to tailor their coupon rates and apply varying rates in accordance with investment amount and timing. This offers a degree of flexibility that is not always available when seeking traditional means of finance.
Mini-bonds can also raise a company’s public profile. The publicity generated by the offer of mini-bonds increases awareness of the company’s brand and products and services.
For example, retail brands sometimes include non-cash rewards in lieu of interest or as an additional perk under the offer. The Mexican restaurant chain, Chilango, raised more than £2m and anyone who invested more than £10,000 was entitled to one free burrito a week!
So is this craze here to stay? It will be interesting to see where the FCA go with their wholesale funding crusade, and whether retail investors continue to buy into the mini-bond revolution – it will only take a few high-profile failures to tarnish the product.
Jonathan’s article in the June 2017 edition of Business-Money magazine.