Why we all need to #investaware

The recent news that the FCA is challenging the explosion of investment promotional activity on social media, especially Twitter, and particularly involving the equity crowdfunding platforms has provoked an outcry from highly knowledgeable people including the much respected City Grump. In essence the FCA has pointed out that using Twitter or LinkedIn to promote your equity fund raising is as much a financial promotion as is sending out a glossy prospectus to a potential investor. Not being regulated and engaging in such activity could earn you a jail sentence and a fine - yuk!

But is this a sledge hammer to crack a thunderstorm of nuts? Perhaps.  

There has been an inconsistency in the mindset of many for years about the risks of private investor activity in the equity markets and indeed debt markets compared with other ways of spending your hard taxed cash. I often raise a wry smile when I comment that there are many a person ways to lose a packet without upsetting the regulator. Let's take buying a new car for example. A quick check on google and I found over 5.2 million global search results on which car loses its value fastest 2014. Further searching narrowed me down to this article on www.fleetnews.co.uk which named amongst other cars the Jaguar XJ which loses a stunning 67% over four years. Then there is going to the races, going on a bender (damages your body as well as your wallet!) and so on. I suppose the key arguments about "wasting your cash" outside your "investing" activities not needing the oversight of the FCA include the fact that you get the enjoyment of the activity you are spending your money on (driving your car, watching the races, getting drunk), trading standards are involved and, for those bothered about this issue, there is piles of information available in the press, in newsletters, on the web and, yes, on social media, about making or more slowly losing your money undulging in these activities. It is ironic that the FCA's rules designed to protect the unwary investor from seeing the opportunities are the self same rules that prevent those individuals from seeing the negative comment too because to say "don't do this deal" are as much advice as those which imply "do make this investment". So no sane commentator, including myself, is going to critique a fundraising opportunity any more than they dare praise it.  

For years, the angel market has been hampered in this way. Fundraising companies are able to chase investment in perpetuity and it is down to the due diligence stage for investors to winkle out the problems. The way investors mitigate the problems is either to walk away from the deal or try to bash down the valuation of the business to mitigate the financial risk they impose. There is some, but not enough, informal warning comment between investors, if there is a bad deal doing the rounds, but in a world of caveat emptor is it in the interests of one investor to prevent their competitor from doing a duff deal - of course not!

Risk in angel, venture capital and now crowd fund investing comes in many forms. There's the obviously illegal - fraud in the main instance. Then there's known knowns, the known unknowns and the unknown unknowns. There is many an indvidual - ranging from an angel network manager to a venture capital fund manager who adopts the responsibility to identify and deal with these risks and yet in the years I have been watching this market I have seen the odd company return again and again (often phoenix-like from an insolvency) to raise money from the latest crop of money people who had not known of its previous existence. Luckily truly fraudulent behaviour is relatively rare, but with hindsight nearly every investment failure can add the epithet to itself that the funds raised "were not used in the optimum way".  

Of course equity and debt investment is into a living thing, unlike buying a car etc. One of the biggest risks in investing is not just making that first investment, it's the impact on share or bond holders on subsequent fundraising rounds; the dilution of equity stakes, the risk to the balance sheet of loading a company with debt, and the risk of not raising any new money at all... However, I do not see risk warnings for existing investors being sent out when a 2nd round investment is underway stating that you should not let the company do this.  

Another big difference between investing and buying a car is that you can sell on the car - even if at a loss. The common view in the angel world is that you will be holding your investment for 7-10 years and in venture capital whilst the period will be less - it is not necessarily so.  Our thriving second hand car industry is testimony to how important the creation of a second hand market is. Now, thanks to the chutzpah of the founders of Asset Match, we at last have a second hand market in company shares emerging. If we all put our weight behind them, they could revolutionise the private investor equity market to a level of significance that outweighs even crowdfunding.  

The FCA in trying to put a lid on financial promotions via social media is doing us all a massive disservice. What they need to be doing is encouraging and enabling as much talk as possible about companies raising money, not just during the fundraising but afterwards as well. We need the angels, venture capitalists, journalists and crowd to be commenting and opining as much as b***dy possible - with the proviso that they do not say anything illegal or defamatory. We all need to look at the rules around what constitutes "advice" and enable anyone to comment on the emperor's new clothes (and return comment by the emperor) without needing to get "regulated" or face the fear of fines or jail, provided of course as I have just said they do not say things that are untrue or criminal.  

Whilst the debate rages about financial promotions, we all miss some of the really dirty risks of business finance. Many of the real risks we face are only just emerging. For example, I was profoundly struck by the comment made by Seonaid Mackenzie (founder of Sturgeon Ventures) at our Private Investor Summit back in March, that it takes a mere three years, if you change your name by deed poll, to obliterate your past entirely. So a dodgy business person could potentially, and if he or she was really determined, re-emerge to take up with gullible investors once again, twice or more a decade, for 40 years or so. The European ruling on privacy and the impact on Google (and indeed the rest of us web publishers) is, in this respect, really, really serious. I want the FCA not to understand that with the genie out of the bottle - and it is - that they have an opportunity to embrace and enable the power of everyone from the crowd to the expert industry analyst to make sure that investors and entrepreneurs (because there are, sadly, bad investors out there too) have equal and full access to knowledge and opinion, not only about the underlying businesses raising finance, but also about such things as the fees and practices of advisers et al. It will only be with true transparency and freedom of speech and the written word that enterprise will be rightly funded. 

The FCA could also turn its attention to its own level of consistency in appraoch to investing. I continue to think it is a travesty that it is permitted to allow certain sorts of investment to only be marketed and traded under the various exemptions to FSMA such as the high net worth and sophisticated investor exemptions. We and they need to understand that this is not an enabler of access to these opportunities, it is a formal derogation of the FCA's responsibility to protect this type of investor. Try talking to someone who has been "done" in a scheme which was under one of these exemptions if you want to find out what it feels like to be without a simple form of redress like asking the FCA to investigate. Just because you are wealthy or indeed "sophisticated" does not mean you cannot fall foul of the incompetant or dodgy.

Our regulator could also take a look at the inconsistency that is the fact that you can sign up to invest in crowd equity on a website, but that if you want to buy a share on the AIM or Main Market of the London Stock Exchange you have to dance through a rigmarole of paperwork and proof of identity reminsicent of the most complicated Scottish reel to find yourself a stockbroker, and that's long before you can even think about actually spending any money on an investment. Let alone (note to the Bank of England) getting a mortgage!

Anyway, it is somewhat ironic that the crowd world, young, enterprising and innovative, the world that the FCA is apparently so concerned about, has found a neat and simple way to make investors (rightly) aware of the very significant risks of investing in private businesses run by someone else. Not only do the crowd funding sites have a deliciously simple risk warning which synthesises exactly what you need to know - see this from www.seedrs.com

"Investing in startups involves risks, including loss of capital, illiquidity, lack of dividends and dilution, and it should be done only as part of a diversified portfolio."

But, and this is pure genius in my view, they have looked at how other industries warn their consumers of the risks. Taking a dram out of the drinks industry's glass with its "Drink Aware" campaign from The Drink Aware Trust, Crowdcube has now set up the hashtag #investaware and the twitter handle @investaware.

If I was the FCA I would be making a polite call to Darren Westlake and Luke Lang and asking if they would mind crowdfunding a very special new Communiity Interest Company called the Invest Aware Trust, I would be giving it seed funding before the campaign starts out of FCA funds and to attract investors I would ensure that HMRC gives it Social Investment Tax Relief status to encourage angels, crowdfunders, VCs and all the ability to fund it to fulfill a mission as an independent body to ensure we all #investaware. 

Dancing to the investment of time, Liverpool Crowdcube, Angellist and more

If you had attended the UK Business Angels Association's Awards ceremony in Liverpool earlier this month, apart from being struck by the venue (Liverpool Cathedral) I think you would have noticed the sea change in the ocean that is private equity. At last crowdfunders, angels and VCs and entrepreneurs have adjusted to the fact that they all have a common mission in mind. And it appears that dissing each other to get ahead is going rapidly out of fashion. Will hearts join wings and pound signs as the favoured images of our world - maybe?!

I rarely comment on a particular deal, but given the opportune timing of the publication of this month's AngelNewsletter, just one day before Crowdcube launches its latest equity campaign to and get this COINVEST ON EQUAL TERMS alongside Balderton Capital, one of our coutnry's most distinguished tech investors -see http://www.crowdcube.com/blog/2014/07/17/balderton-capital-invest-3-8m-crowdcube/, the opportunity has to be taken.

This campaign is probably the most public example yet of why the UK can claim to be the leading innovator in financial services in the world. It is a shot over the bow of angels and VCs sceptical of crowd funding and crowd funders who are similarly hostile to establishment investors. Stop carping from the sidelines and come and play nicely with and learn from each other, please. Let's face it VCs and angels are all live on the crowd - for goodness sake, Mike Jackson's WebStart Bristol has even raised a seed fund on Seedrs - not once but twice! The world will never be the same again.

Up in Liverpool I met Andy Chung of Angellist, the US platform for angel deals, which is now planning to launch formally in the UK later this year. For those of you who do not know Angellist just go to its website - it will be self explanatory - angels are now out of their cupboards and shouting about it. But what you may not notice immediately is that it DOES NOT CHARGE either investors or entrepreneurs to make use of its services for a basic fundraising and it only charges carry at the time of exit on its syndicates https://angel.co/help/syndicates#syndicates-cost.

That is something that all angel groups, VCs, advisers and many, many others (including the FCA) need to notice. Even if the only impact is to take friction out of the market by challenging/removing the notion of commissions on fundraisings, that on its own will be highly and deeply significant. But most of all it is highly and strategically significant to the whole private equity industy (those in PE houses need to take note too by the way!). We are now seeing the true and lasting impact of the web on the financial services industry and that impact will be just as significant as the tsunami that has hit music, books and the press.

In this new dance to the investment of time, we are all going to have to rethink our position on the floor, but most of all we are going to have to be able to make the case far more clearly and succinctly about the value and the services we offer, particularly if we are going to charge for our services. That is going to be a challenging, but wealth giving opportunity for most of us as we start applying a price where value is due and perhaps removing a price where value does not really exist. But for the greedy and selfish who exploit the unwary entrepreneur or investor be warned and be scared. 

The world won't come to a stop with everything to do with financial services becoming free on the web. Look how the newspaper industry has helped its customers see the value of its different offerings - from subscription models to paid for with advertising sites. And in music we have seen an explosion in music overall with everything from free online access to a stunning growth in festivals, concerts, merchandise etc. We now pay for live when we used to pay for recorded. Don't laugh, but will we, in due course, see the scepticism about "paying to pitch" reverse itself?

I don't think I have ever been more excited about angel and VC investment since I joined the industry at the time of the dotcom boom - I hope you feel the same as you depart for your summer holidays. See you in the autumn when I suspect there will be even more examples of innovative behaviour for me to comment on!

What would Scottish independence mean for patents?

The future of IP protection in Scotland is only now being debated in the independence conversation. In view of the importance of this subject to Scottish business, as well as UK or foreign companies and individuals who do business and/or will do business within Scotland, here we address the issue in a non-biased manner, to offer up some topics and considerations for debate.

The Scottish government's blueprint for independence, which was published in November 2013, mentions IP on pages 102 and 418. It reads that "continuity of the legal framework for protecting intellectual property rights" will be ensured and proposes an independent Scotland would look to adopt a "utility protection scheme". This, according to the White Paper, would allow Scotland to offer a simpler, cheaper and more business-friendly model than the current UK system, "which is bureaucratic and expensive, especially for small firms".

One topic not explicitly covered in the White Paper is whether or not an independent Scotland would seek to create its own Scottish Intellectual Property office (Scottish IPO) or whether it would seek to make use of the UK Intellectual Property Office (UKIPO), which processed almost 1,000 patent applications and over 1,500 trade mark applications from Scotland in 2011.

A Scottish IPO would involve large start-up costs, and its formation would possibly have to be subsidised by the taxpayer. Should the intention be for an independent Scotland to use the UKIPO, then a period of negotiation would be required before any possible agreement. With these thoughts in mind, we wrote to the UKIPO for its comments.

View from the UKIPO

John Alty, Chief Executive and Comptroller General of the UKIPO, noted that his organisation employs more than 300 patent examiners and processes in excess of 20,000 patent applications annually in fields varying from quantum computing to footwear. Alty suggests a Scottish IPO would need to be able to examine patent applications across a similar breadth of technology areas to keep the same quality of service provided by the UKIPO. Additionally, it is unclear what would happen to existing patents granted by the UKIPO, for example whether they would continue to be valid in an independent Scotland.

However, as Alty points out, a number of independent countries already allow UK IP rights to be extended upon completion of certain local formalities and there is no need for the UK government to approve such arrangements, but the UK does not offer reciprocal re-registration of rights granted overseas. Thus, it may be the case that any future independent Scotland could allow UK patents to extend to Scotland, but, for now at least, if Scotland were to form its own patent office to grant Scottish patents, it would not be possible to extend these to the remaining parts of the UK. This will most likely lead to increased costs for the user wishing to seek protection in both the UK and Scotland. To read the rest of the article, visit www.managingip.com/Blog/3328701/Guest-post-What-would-Scottish-independence-mean-for-patents.html.