Fees
Some networks and syndicate managers charge membership fees, but most do not. Some also charge entrepreneurs upfront fees to process deals, but again most of the best do not make upfront charges as this deters many of the better entrepreneurs as they may feel they will be able to find a network that will work with them and not charge upfront fees.
Of course these organisations will charge for their services but they usually do this by charging a success fee to the company. This has two principal advantages:
1 The company only pays when it receives finance.
2 All of the angels’ money attracts EIS reliefs, which would not be so if they were charged fees directly.
FSA rules
It is helpful to have some basic understanding of the Financial Services Authority (FSA) rules if only to judge whether the organisation you are dealing with operates within them – and thus legally.
It is clear that a number of websites and networks which are focused on angels operate outside these rules. A quick check is that those who are within the rules will prominently state they are “authorised and regulated by the FSA” – as they are required to do. If they do not you need to be vigilant as contempt for the rules implies contempt for the customer, which in this case is you.
The only FSA rule of concern to the angel relates to financial promotion. To quote from the FSA’s website:
“A financial promotion is any communication that is an invitation or an inducement to engage in investment activity. In other words, there is an element of persuasion. An inducement is intended to lead, ultimately, to an agreement to engage in investment activity. So an advertisement by a firm claiming customers will make a fortune by investing in securities, and that the firm can help them invest, is an inducement to engage in investment activity.”
The FSA imposes strict rules on those who seek to promote financial investments to individuals because of the risks associated with inappropriate advertising to consumers. This is designed to protect members of the public from unscrupulous selling.
The FSA rules used to make the promotion of unquoted investment opportunities both difficult and expensive. However, the rules relating to approaching high-net-worth or sophisticated individuals were relaxed to remove barriers to business angel activity.
It is possible to self-certify yourself as a high-net-worth (HNW) or sophisticated investor and you need to do so to join all reputable angel networks or syndicates.
Self-certifying
To self-certify as HNW you have to earn at least £100,000 per year or have net assets (excluding your property) of at least £250,000.
To self-certify as a sophisticated investor you must:
Have been a member of a business angels network for at least six months; or
Have made at least one investment in an unlisted security in the previous two years; or
Have worked in a professional capacity in the provision of finance to small or medium-sized businesses in the last two years, or in the provision of private equity; or
Be or have been within the last two years a director of a company with a turnover of at least £1m.
These particular tests are close to nonsense – for example how does being a director of a small company imply sophistication as an investor? – but these are the tests nonetheless. If you can’t honestly self-certify as a HNW individual or sophisticated investor I doubt that you should seriously consider angel investments.
The self-certification has to be in writing and you can easily find examples of these certificates by putting “high net worth self certification” into a Google search. When accepted as a HNW or sophisticated investor, the protections available for investors from the promotion of securities by a person authorised under the Financial Services Act are removed, so you will have limited comeback against the deal promoter if they are found to be in breach.
The other thing you will have to do when becoming a client of a network or syndicate manager is to produce the standard anti-money laundering information, such as a certified copy of your passport and a recent utility bill.
The Angel CoFund
The government-backed £50m Business Angel Co Investment Fund (the Angel CoFund) was launched in November 2011. Its aim is to boost the quality and quantity of business angel investing in England by investing alongside business angel syndicates. It provides a very promising source of help for putting angel-based financing packages together because its money can facilitate investment by syndicates.
Whilst this fund is not a source of deal flow, I have included it in this chapter because of its close link to angel networks and syndicates. You may come across it when you join a syndicate of investors and you may approach it if you are putting your own angel syndicate together.
The principal features of the CoFund are:
It can make initial equity or quasi-equity investments of between £100K and £1m in SMEs alongside syndicates of business angels.
You can see full details on the CoFund’s website (www.angelcofund.co.uk).
At the time of writing I have completed three deals with the CoFund and have two others in process so I do have detailed knowledge of how the fund works. Its management team is professional, personable and pragmatic. Importantly, in the deals I have handled, their investment has fitted in well with the investment structures which were already in place.
I am encouraged by my experiences with the CoFund. I have had lots of dealings with public sector supported funds and this is one of only two that has been a straightforward experience – and the other is also an angels matching fund.
Summary
One of the biggest challenges an angel faces is deal flow. I have stressed how important it is to have strong deal flow if you want to build a portfolio with a good chance of achieving attractive financial returns. I am quite clear that the two best routes to this are to work with your existing network of contacts and to join a small number of reputable angel networks or syndicate groups.
Membership of one or more good angel networks is an excellent way not only to see good deal flow but also to solve many