How we assisted a private limited company with the issuance of mini-bonds

We recently assisted a client with the issuance of a loan note / bond, a form of debt finance used by companies to generate capital.

What is a loan note / mini-bond?

A bond or a loan note will be issued by the borrower, whereby the lender (investor) provides capital to the borrower under the terms of the bond, with the expectation that the borrower will, at a future date, repay the capital (usually with interest).

Lawyers refer to loan notes and bonds interchangeably and there is no distinct legal difference between the two. Whether an instrument is referred to as a bond or a loan note tends to relate to the length between the date of maturity (i.e. the date on which the borrower’s final payment is due) from the issue date.

Bonds i.e. corporate and retail bonds are tradable securities, thus such bonds can be freely purchased, sold and resold on the various stock markets. Conversely mini-bonds are illiquid (cannot be traded), a mini-bond must be held by the lender for the full term of the mini-bond i.e. until the maturity date.

The benefit of issuing mini-bonds as opposed to corporate or retail bonds lies in mini-bonds relative lessened level of regulation, mini-bonds are not approved by the Financial Conduct Authority (“FCA”). There is no requirement that mini-bonds be issued with approved prospectuses, they are generally higher in risk compared to their regulated counterparts.

In recent years the FCA, in retaliation to a swathe of dubious mini-bond schemes rendering thousands of retail investors out-of-pocket, have sought to protect retail investors from speculative and / or fraudulent issues of mini-bonds.

Specifically, the FCA’s response sought to weed out speculative mini-bonds by curtailing the marketing (financial promotion) of such bonds to individuals who fall within one of two categories i.e. sophisticated investors or high net worth individuals. In short, limiting the mass market of mini-bonds only to individuals who understand the risks with these forms of investments or individuals who can afford to take such financial risks, due to their market knowledge or high net worth.

To fall within one of the two categories, high-net-worth individuals and / or sophisticated investors self-certify in accordance with Article 48 or Article 50A of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”).

This self-certification by the investor thereby exempts the borrower from the restriction on financial promotions under section 21 of Financial Services and Markets Act 2000 (“FSMA”) and permits the borrower to provide the investor with the unregulated financial promotion materials i.e. the information and documentation relating to the mini-bond.

How we helped our client (“Company”)

The Company was seeking to raise £1m through the issuance of mini-bonds, the capital would then be used to fund the expansion or various new projects planned by the Company. The mini-bonds would eventually be marketed to individuals who self-certified as high-net-worth individuals in accordance with Article 48 FPO.

From the outset we explained that before the lenders (“Investors”) received any invitation or inducement to buy the mini-bonds, they must first execute a self-certification letter.

We drafted a letter that incorporated the statutorily prescribed wording in the prescribed style to satisfy the requirements of Article 48 and Schedule 5 Part 1 FPO. The Company then circulated this letter to the prospective Investors, so that those Investors may return signed versions to the Company, evidencing their understanding of the risks involved in buying the unregulated mini-bonds.

The Company provided us with a term sheet, that detailed the basic scope of the mini-bonds i.e. the interest rates, the term and maturity, repayment conditions, planned expenditure, tranche purchases etc.

We then took the term sheet and incorporated those terms into a formal information memorandum, which in essence acted as a short-form prospectus. The memorandum not only detailed the terms of the mini-bonds but also included the following details relating to the Company:

• the opportunity, i.e. a summary of the Company’s business and its offering;
• the Company’s financials, including growth forecasts and assumptions;
• the investment proposal i.e. the finer details of the mini-bonds;
• risk factors relating to both the Company and the purchase of the mini-bonds;
• the tax implications for the Investors; and
• any additional information relating to the Company.

Appended to the memorandum was an instruction letter, detailing to the potential Investors, how they could go forth and purchase the mini-bonds. In addition to the instructional element of the letter, there was also a formal subscription agreement, that the Investor could complete and provide to the Company. This subscription letter detailed precisely how many mini-bonds the Investor intended to purchase, the subscription price and the specific details relating to that Investor e.g. name, correspondence address etc.

Whilst the memorandum was circulated to the investors, we began producing the loan note certificate i.e. the formal instrument that demonstrated the Investors ownership of the mini-bond. This instrument was a short form certificate i.e. detailing the number of mini-bonds owned and by who. Then appended to the certificate were the specific terms and conditions of the mini-bond i.e. the interest rate, non-transferability provisions, repayment conditions, maturity date etc.

Lastly the final document which we produced was the board minutes which evidenced that the relevant authorisations were gathered by the Company’s board in respect of the issuance of the mini-bonds. The board minutes also authorise the Company’s directors to execute the loan note certificates on behalf of the Company.

If you are looking for advice or legal assistance as you consider undergoing the issue of mini-bonds or raising finance through other debt or equity methods, please email our We Will help email address at wewillhelp@jonathanlea.net and we will get in touch to set up a 20-minute no-cost no-obligation intro call with one of the fee earners here to understand your situation further.