Dirk van Dijl, the highly respected sponsor of Enterprise Britain, who will edit this blog, is about to suffer a double whammy. Dirk believes that funding for newer enterprises should come either from controlled funds or crowd funding. I shall now question both. The answer is that all finance should emanate from market operations (smaller equity markets, as one example) where performance is required before the payment of fees.
The sad events at 3i, Britain’s biggest quoted private equity firm, provides a clear signal that funds don’t work. Beyond the headlines at 3i it’s worth looking at what is actually happening. The latest (of many) chief executives, Simon Burrows, is slashing costs, sacking staff, and trying to change the articles of association so that it can return cash to shareholders. This is exactly what Vince Cable will be doing in several years time when he finds the Government sponsored funds aren’t adding anything to the economy.
However the real reason why this is happening at 3i is because the Financial Services Authority (“FSA”) is insisting that it holds capital proportional to its operating costs. 3i is not serving the community it was set up to help.
There are a number of funds being established to help SMEs. All will have ridiculous overheads (“I’m an investment manager: I demand £300,000pa” plus six week’s holiday plus a nice office plus an index linked pension and I’ll see clients on Tuesdays if I’m not playing golf with the minister.”) There is no accountability. It will be years before the ill conceived lending shows results and often poor ones.
It is estimated that funds use up to 35% of their capital in paying for overheads.
Crowd funding is unregulated Dragon’s Den theatre. Business people, unable to raise finance anywhere else (and there’s a clue there), present to rooms of investors and take their hard earned cash away. The FSA have, at last, realised that it’s likely to be the next big financial fraud. As usual they are way behind their American counterpart.
At the end of 2012 the Securities and Exchange Commission (“SEC”) will be introducing legislation (editor: in fact the SEC will merely be introducing regulations as the legislation allowing crowdfunding has already been signed into law under the JOBS act) covering crowd funding under the JOBS Act. The regulations will include annual limits for investors based on annual income and/or net worth. If your income is below $100,000 you may only invest $2,000 or 5% of your net worth. Over $100,000 and the limits increase to 10% of annual income or net worth to a maximum of $100,000. Issuers will be subject to a maximum of $1m in a 12-months period. There must be an intermediary – a broker or what the Americans call a funding portal. The information must be filed with the SEC. There are advertising restricting. The disclosure requirements are draconian.
I suspect that Dirk and I are not that far apart. We both want what is best for Enterprise Britain. Debate is healthy. Freely available finance for enterprising businesses is even better.