EquiBond – proposed guidelines as a new way for SME’s to raise capital

BBFTA News Editor | | PERMALINK

To give an outline of what an EquiBond is:

An Equibond can be built on the success of crowdfunding in that it will allow SME’s to raise a limited amount of capital from private investors. Equally, EquiBonds be traded on a Digital Exchange, so therefore can be bought and sold 24/7 by investors.

 

This offers an exit for those investors thus offering liquidity (which is missing from many crowdfunding propositions). An EquiBond also aligns investors’ and entrepreneurs’ interests since the time taken for the invested money to be redeemed will be reduced and hence the quicker the entrepreneurs can grow their revenue. Historically investors have had to rely on dividends to receive a return, which can only be generated if the company is profitable (which many smaller firms are not as focused on they often are more interested in growing the business).

Proposed guidelines:

  • Companies issuing an EquiBond are required to have at least 1 year’s audited accounts ensuring that a third party has reviewed the company’s financial position. This means that EquiBond investors will also avoid 20% of those businesses which become insolvent within 12 months of being established;

  • The maximum that can be raised is €8 million - same as current crowdfunding limits;

  • The maximum an investor can invest in a tax year into EquiBonds is £20,000 - same as the annual ISA allowance;

  • An EquiBond can be held in an ISA;

  • An investor can invest a maximum of £5,000 p.a. into each EquiBond - so not overly exposed to individual issue;

  • The income on an EquiBond is tax free;

  • Investors will be subject to full KYC and AML checks, which can be carried out by the exchange where the EquiBond is to be traded on;

  • 10% of any monies raised from an EquiBond issue is to be paid to the National Lottery - so helping good causes and ensure that there is governance and independency as to the beneficiaries;

  • The total costs of issuing an EquiBond cannot exceed 5%. Therefore, including the 10% given to the National Lottery, investors are assured that 85% of the capital raised will be deployed into the company in which they are investing;

  • Money raised from an EquiBond is treated as capital so not taxable for the company receiving the capital;

  • Initially the EquiBond pays 10% of its revenue to investors above a pre-agreed level of company turnover. Once the initial capital invested is repaid, the share of revenue reduces to no more that 2% of the company’s Earnings Before Interest Tax Depreciation and Amortisation (EBITDA);

  • The income generated from a share of a company’s revenue is calculated based on the number of days the investor has owned the EquiBond - and can be paid as frequently as monthly;

  • The company wishing to raise capital has to have at least one non-executive director on its board; 

  • The directors need to have professional indemnity insurance (PI) in place as this will mean a third party (i.e. the firm offering insurance) has reviewed the company in order to agree to offer PI;

  • To issue an EquiBond, a company must produce a mini prospectus with any stated facts and claims fully verified.


There will be a prodigious need for SMEs to raise capital in Europe, the USA, UK and other jurisdictions and it is intended that EquiBond can help to this demand. Various discussions are currently in place and Digital Bytes will release further updates as soon and as when they are available.