Dirk’s double whammy…or not?

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.

2 comments for “Dirk’s double whammy…or not?

  1. Panos
    2 July, 2012 at 08:27

    I believe crowdfunding has been unfairly dismissed as the ‘next big financial fraud’. Let’s put things into perspective here. We have had a week where the Business Secretary, Vince Cable called the City a ‘massive cesspit’, Barclays Chairman had to resign following the £290m fine for Barclays’ apparent attempt to try and fix Libor. These events took place in the so called heavily regulated environments. Assuming there is another side to this, the so called ‘unregulated’ (in as far as US and UK is concerned) environment where in the writer’s opinion ‘Business people’ who cannot raise finance anywhere else they will try crowdfunding as a last resort. I think there is a misconception here about what crowdfunding really is and how it works.

    Crowdfunding is based on the concepts of ‘crowdsourcing’ and the ‘wisdom of the crowds’. All these terms have entered our everyday parlance with the rise of online social media and its resulting instantaneity. A good example of the latter can be seen elsewhere, in instant activism whether of political, environmental or even personal levels. It is a new way of ‘doing things’ in as much as it was a new way to do online banking in the late 90s when the internet was beginning to penetrate every home.

    The advantage of crowdfunding is not just the mere fact that multitude of people will contribute a small amount in order to attain a certain monetary goal and hence the risk spread is lower. The additional advantage and just as important is that the crowd (‘market’) tells the entrepreneur (‘business people’) instantly whether they Like or Dislike his/her proposed product/service. In other words forget your expensive marketing focus groups and huge advertising budgets. This is real everyday people telling you whether your project is heading up or down. Thirdly there is transparency. Whether you are a funder or being funded, in social media you have an identity not just in your Tweeter, Facebook, LinkedIn profiles but in your everyday streaming of them. Your funders will do their own due diligence based on this freely available information and will carry out their own data mining, to form an opinion on who you really are and what your proposed project is all about.

    Now if the SEC in the US, where a granny can lose all her life savings in a single online gamble and no regulated authority will protect her, attempt to try and kill crowdfunding to protect the established regulatory status quo, is another sad story. I sincerely hope the FSA does not follow their misinformed lead. Besides the latter must be busier with bigger fish to fry as already mentioned at the outset.

    I believe Dirk who doesn’t suffer fools gladly, has woken up and smelt the coffee and is probably heading for a Hat Trick, never mind the Double Whammy!

  2. Richard Hoblyn
    27 June, 2012 at 08:21

    Excellent post here Tony. The thing here is that 3i and such funds are really buying into relatively new businesses, usually around 1 y.o., i.e those too immature for Plus/AIM/etc. Crowdfunding is challenging the myth that start ups are created by sole entrepreneurs (Zuckerburg, Branson, Sugar)whilst giving others an opportunity to participate and NO levels should be set by SEC or any regulator on this. Personally I’d like to see the UK government create zero tax partnerships up to 5 people and a zero regulatory environemnt for all businesses under £5m turnover irrespective of what industry they’re in (that includes brokerages). It is red tape and regulation that is killing business NOT the failure of investors wanting to invest.

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