In July 2015, George Osborne, the Chancellor at the time, announced that peer-to-peer (P2P) investments were eligible to be held within a newly formed ISA, the Innovate Finance ISA (IFISA). After successful lobbying by several companies operating in the alternative lending space, who were not quite fully defined as P2P, the HMRC permitted other debt-based securities originated through crowdfunding platforms to be included in a tax-efficient IFISA. A peer to-peer investment is defined by the FCA under article 36H as a P2P ‘agreement by which one person provides another person with credit’ through an electronic platform. While other debt-based crowdfunding platforms often act as an intermediary between the investor and borrower.
This legislation change has created a flurry of new innovate debt-based products, eligible to be held within an Innovate Finance ISA. Typically, businesses seeking funding approach these types of platforms to raise funds through debt-based instruments such as Crowd Bonds and Debentures. This offers retail investors, and increasingly the IFA market, the opportunity to earn reasonable returns within an ISA wrapper, providing tax relief on returns.
Crowd Bonds are unlisted bonds that can be either secured or unsecured, depending on the purpose of the fund raise and the business raising funds; simply put, an IOU made by a company in return for a fixed interest rate over a fixed period. Typical investment terms range from two years to five years with investors receiving their money back at the end of the investment term following regular interest payments. A condition of ISA eligibility is that debt-based securities must be transferable, however, the realistic level of liquidity offered by these products is extremely low and investors should expect to invest for the duration of the term. The majority of platforms offering Crowd Bonds present investors with a range of businesses they can fund. Users of the platform are required to conduct due diligence on each opportunity and are responsible for their own diversification.
Unlike a listed retail bond where the terms of the bond are held within a prospectus, investors must evaluate opportunities online via online platforms. Financial accounts as well as other documentation are downloadable for review. A company issuing a Crowd Bond must have appropriate permissions to receive deposits and make interest payments, but the instrument in itself is not a regulated product.
Rates of returns can be higher than other fixed income products but the the level of risk may be proportionally higher.
Who are the Crowd Bond, IF ISA Eligible players?
Drawing on over 20 years’ experience in structuring alternative investment products, Downing LLP launched Downing Crowd in March 2016. Traditionally, Downing raises capital from IFAs using tax- efficient VCT/ EIS vehicles. With the introduction of Downing Crowd, the limited partnership is offering investors an opportunity to invest in businesses through Crowd Bonds. Since establishing in 1986, Downing claims to have raised £1.7bn from 35,000 investors.
Downing Crowd helps businesses raise funds by issuing individual Crowd Bonds to their investor base. Typically, Downing offers interest rates between 4%-7% and investing is open to both IFAs and direct retail investors. Since launch, £22 million has been originated through the Downing Crowd platform with businesses ranging from care homes to solar projects. As investors are selecting individual businesses they are responsible for their own diversification and due diligence. Information on each bond issue is held within the Bond Offer document accessible via the Downing Crowd dashboard.
Businesses on the Crowd for Angels crowdfunding platform can raise funds through equity or by issuing Crowd Bonds. Each equity investment or Crowd Bond is presented to investors, with details of the individual company’s business plan and financials. Crowd for Angels offers secured interest rates between 6.4%-12% and investing is open to both IFAs and direct retail investors.
Similar to Downing, Goji is targeting both IFAs and retail investors, although retail investors do have to pass a self-certification questionnaire before investing. Goji offers investors the opportunity to invest in a diversified pool of peer-to-peer lending loans. Using the Crowd Bond investment structure, investors are able to hold their investment within an Innovate Finance ISA (IFISA). This is different to the Downing Bond or Crowd 4 Angels structure as you are investing directly in Goji’s ability to select and earn a return from peer-to-peer lending opportunities. The investment closely reassembles Bond Mason’s offering.
An annual return of 5% is targeted net of a 0.95% fee with a minimum investment of £1000.
Other non-Crowd Bond players?
There are a number of debt issuers who offer other types of debt-based securities through the Innovate Finance ISA but do not identify their products as Crowd Bonds.
Abundance Generation, an early pioneer in online alternative lending having launched its platform in 2009, offers a range of different debentures. These debentures operate similarly to Crowd Bonds inasmuch as an investor’s capital is lent in return for interest. However, investors in Abundance generally receive their capital repayments over time and not at the end of the term. Projects are generally renewable energy focused and terms can be up to 20 years. In addition to interest earned on investments, Abundance also offers a 2% AER return on ISA cash balances until 31 May 2017.
UK Bond Network also offers debt instruments to retail investors. However, registration requires investors to self-certify as a sophisticated investor or high-net-worth. Investors are offered bonds issued by both listed and unlisted businesses. UK Bond Network conducts upfront due diligence on every bond presented and investors can gain significant information on each issue via the online platform.
Investors and advisers can look beyond peer-to-peer lending to benefit from other forms of debt investments within an Innovate Finance ISA. However, with a relatively light regulatory touch, investors should be cautious and perform in-depth due diligence on Crowd Bonds and other forms of debentures. In the coming years we expect this market to grow with further products being added to the market.