31st July 2014
Financial firms are now able to apply crowd-funding techniques to convertible loans opening up a source of new source of potential returns to retail investors. These have generally only been offered to business by City institutions in the past.
One firm, Crowd for Angels, believes that it is unique among its peers in offering ‘the crowd’ the ability to invest in the convertible loan notes of listed firms.
Complying with the recently-introduced Financial Conduct Authority regulations for crowd-funding, Crowd for Angels offers investment to three categories of investor – high net worth, sophisticated and mainstream investors, with the restriction that the latter group invest only 10 per cent of any portfolio.
The founder and director of Crowd for Angels, Tony De Nazareth, says his firm also gets potential investors to answer a series of questions to help ascertain whether they fit into these categories.
The first listed debt ‘pitch’, as the site describes it, is All Star Minerals plc, an Australian mining company with a market cap of £1.5m listed on ISDX index.
It is looking to raise £250,000 for a period of 540 days with a rate of 12% interest on offer, per 360 days.
Investors have the option to convert their loan notes into equity after 360 or 540 days with the loan should convert at about 10% discount to the prevailing market price.
Investors, says De Nazareth, can simply utilise the service to make a loan and earn the interest on it, but they have the option to convert the note into equity. De Nazareth stresses that it is an option. He contrasts this with other offers from rivals which may require conversion of the loan into equity.
He says: “We are the first regulated crowd funding company to offer the crowd the opportunity to invest in listed companies through short term convertible loan notes. People have the choice of simply holding the loan notes until maturity to earn the interest and get repaid. They also have the option to convert their notes into shares of the company if they so wish.”
He adds that loans to listed firms should have added appeal. “It is so much easier for potential investors to do their due diligence as listed companies tend to have much more reliable information about them than private companies.”
The end investors are not charged anything. For companies accessing funding, the charges are five per cent for private companies and 3.5% for listed firms, plus 2% on the amount ‘converted’. The charges are all success based, so the firm doesn’t take money upfront.
The firm also plans to offer the opportunity to invest in convertible loan notes to unlisted companies and currently hosts bids in the better known equity crowd funding market.
De Nazareth says that the equity side, the firm “doesn’t try and do real start ups, the pub launch, calculated on a beer mat. Our due diligence takes more time. We worry about the management.”
De Nazareth has a long track record in convertibles, previously working with a hedge fund that offered the funding rather than aiming to raise money from the crowd.
He is quite sceptical of longer term corporate bonds which have proved popular in recent years, that offer terms of five years or more.
He says: “Lending to companies and getting them to repay money monthly or quarterly looks to me like a reverse pyramid, where you lend them the money and they pay you back with that money. I always wonder what happens in the 4th or 5th year. I am keen on short term money, providing good returns with an element of risk, but where all the information has been vetted but by professional advisers, with a set of accounts, and other information on the regulatory news service.”
De Nazareth makes much of its stance of knowing the customer including asking investors questions about themselves to ascertain if an investment is right for them. Yet he adds that if investors don’t quite understand, they should go to an IFA, while the usual fundamentals still apply such as spreading their investments.