kapitalized-blog

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ASIC Releases Guidance on Australian ICOs September 2017 by Kapitalized

Kapitalized article at https://kapitalized.com/blog/asic-releases-guidance-on-australian-ico-sep-2017

ASIC Releases Guidance on Australian ICOs September 2017

ASIC has Provided Regulatory Guidance on Initial Coin Offerings in Australia

The following is a summary from ASIC’s website.

  ASIC is aware of the global interest in the use of ICOs (Initial Coin Offerings or Token Offerings) by businesses to raise funds. A number of international regulators have issued guidance on the application of their securities and financial services laws on ICOs.

ASIC recognises that ICOs have the potential to make an important contribution to the options available to businesses to raise funds and to investment options available to investors. An ICO must be conducted in a manner that promotes investor trust and confidence, and complies with the relevant laws. Whether the Corporations Act applies to an ICO will depend on the type of ICO offering and what rights attach to the coins from the ICO itself, underlying coins or tokens used in the ICO (all referred to as ‘coins’ for the purposes of this information sheet).

ASIC aims to assist businesses to understand their potential obligations under the Corporations Act by issuing the guidance contained in this information sheet. ASIC also encourages businesses to approach the Innovation Hub for informal assistance.

What is an ICO?

An initial coin offering (ICO) is a new form of funding, used by a business or individual to raise funds from various types of investors through the internet. An ICO can also be referred to as an ‘initial token offering’ depending on the context.

ICOs generally operate by allowing investors to use cryptocurrency (such as bitcoin) to purchase coins via the internet for a set period of time. The ICOs are often global offerings which can be created anonymously and/or accepted anonymously.

ICOs typically vary in nature and may raise funds for a variety of projects, including the development of a new cryptocurrency or distributed ledger technology (for example, blockchain) related services. Anyone with access to the internet can create or invest in an ICO.

For a discussion of distributed ledger technology see ASIC Information Sheet 219.

What is the legal status of ICOs?

In Australia, the legal status of an ICO is dependent of the circumstances of the ICO, such as how the ICO is structured and operated, and the rights attached to the coin (or token) offered through the ICO.

In some cases, the ICO will only be subject to the general law and the Australian consumer laws regarding the offer of services or products. In other cases, the ICO may be subject to the Corporations Act.

This information sheet considers types of ICO offers and whether the Corporations Act might apply to them based on attributes of some typical forms of offerings.

It provides guidance on the legal status of ICOs made available to investors in Australia regardless of whether the ICO is created and offered from within Australia or offshore.

When could an ICO be a managed investment scheme?

A managed investment scheme (MIS) is defined within the Corporations Act. Basic indicators of whether an arrangement is an MIS are as follows:

people contribute assets (such as digital currency) to obtain an interest in the scheme (‘interests’ in a scheme are generally a type of ‘financial product’ and are regulated by the Corporations Act)

the assets are pooled together with one or more other contributors or used in a common enterprise to produce financial benefits or interests in property, and

the contributors do not have day-to-day control over the operation of the scheme but, at times, may have voting rights or similar rights.

Application to ICOs

An assessment of what rights are attached to the coins (or tokens) issued under an ICO is the key consideration in relation to assessing the legal status of an ICO. For this purpose what is a right is to be interpreted broadly and includes rights that may arise in the future or on a contingency, and rights that are not legally enforceable. If the value of the coin is related to the management of an arrangement as described above, the issuer of the ICO is likely to be offering an MIS.

In some cases, ICO issuers may frame the entitlements received by contributors as a receipt of a purchased service. However, if the value of the digital coins acquired is affected by the pooling of funds from contributors or use of those funds under the arrangement, then the ICO is likely to fall within the requirements relating to MISs. This is often the case if what is offered through the ICO has the attributes of an investment.

If an MIS is being used there are a range of disclosure, registration and licensing obligations under the Corporations Act.

When could an ICO be an offer of shares?

A share is a collection of rights relating to a company. There are a range of types of shares that may be issued. Most shares issued by public companies are ‘ordinary shares’, and carry rights regarding the ownership of the company, voting rights in the decisions of the body, some entitlement to share in future profits through dividends, and a claim on the residual assets of the company if it is wound up.

Most shares issued in Australia would come with the benefit of limited liability as well.

More information about shares

When an ICO is created in order to fund a company (or to fund an undertaking that looks like a company) then the rights attached to the coins issued by the ICO may fall within the definition of a share.

The bundle of rights referred to above may be used by ASIC to help determine if a coin is in fact a share. If the rights attached to the coin (which are generally found in the ICO’s ‘white paper’, a document issued by an ICO which may appear to be similar to a prospectus) are similar to rights commonly attached to a share—such as if there appears to be ownership of the body, voting rights in decisions of the body or some right to participate in profits of the body shown in the white paper—then it is likely that the coins could fall within the definition of a share.

Where it appears that an issuer of an ICO is actually making an offer of a share, the issuer will need to prepare a prospectus. Such offers of shares are often described as initial public offers (IPOs).

By law, a prospectus must contain all information that investors reasonably require to make an informed investment decision.

Importantly, though an ICO may appear to be similar to an IPO, the ICO may not offer the same protections. Where a prospectus for an IPO does not contain all the required information, or includes misleading or deceptive statements, investors may be able to withdraw their investment before the shares are issued. No such protection exists for ICOs made without a prospectus.

For more details about the information a prospectus should contain see Regulatory Guide 228.

When could an ICO be an offer of a derivative?

Section 761D of the Corporations Act provides a complex definition of a derivative. For the purpose of this information sheet  a ‘derivative’ is a product that derives its value from another ‘thing’ which is commonly referred to as the ‘underlying instrument’ or ‘reference asset’.  The underlying instrument may be, among other things, a share, a share price index, a pair of currencies or a commodity (including a cryptocurrency).

Two examples of derivatives are options and futures. An option is a contract between two parties. The buyer has the right, but not the obligation, to buy (or sell) an asset, at a set price, on or before a specified future date. Futures are contracts to buy or sell a particular asset (or cash equivalent) on a specified future date. This may involve the use intermediaries, who themselves may need to be licenced.

Application to ICOs

If an ICO produced a coin that is priced based on factors such as a financial product or underlying market or asset price moving in a certain direction before a time or event which resulted in a payment being required as part of the rights or obligations attached to the coin, this may be a derivative.

We are aware this is an area that smart contracts are suggested to be utilised by traditional financial services business to increase efficiency by digitalising this step.

For more information on the licensing of derivatives see our licensing pages.

Trading of coins on a financial market?

A financial market is a facility through which offers to acquire or dispose of financial products are regularly made. Anyone who operates a financial market in Australia must obtain a licence to do so or otherwise be exempted by the Minister.

Application to ICOs

In the event that the ICO (or underlying) coin is found to be a financial product (whether it is a managed investment scheme, share or derivative), then any platform that enables investors to buy (or be issued) or sell these coins may involve the operation of a financial market.

To operate in Australia, the platform operator may need to hold an Australian market licence unless covered by an exemption.

More infomation on markets ICOs are sometimes referred to by industry as a form of crowd funding. Crowd funding using an ICO is not the same as the ‘crowd-sourced funding’ (CSF) that will be regulated by the Corporations Act from 29 September 2017. Care should be taken to ensure the public is not misled about the application of the CSF laws to an ICO.

Under the new laws CSF will be a financial service, often including a platform or market, where start-ups and small businesses raise funds, generally from a large number of investors that invest small amounts of money. There will be specific rules for the CSF regime which reduce the regulatory requirements for public fundraising while maintaining appropriate investor protection measures.

The rules require that a provider of CSF services must hold an Australian financial services licence with authorisation to provide this service.

More information about the CSF regime

A non-cash payment (NCP) facility is an arrangement through which a person makes payments, or causes payments to be made, other than by physical delivery of currency.

This type of facility can be a financial product for which an AFS licence is required if payments can be made to more than one person. An intermediary that arranges for issue of a NCP facility may need an AFS licence, or to act on behalf of an AFS licensee.

Application to ICOs

Coins offered under an ICO are unlikely to be NCP facilities, ­though they may be a form of value that is used to make a payment (instead of physical currency). An ICO may involve a NCP facility if it includes an arrangement that allows:

payments to be made to a number of payees in this form, or payments to be started in this form and converted to fiat currency to enable completion of the payment. For general information on NCP facilities, including the low-value exemption that can apply see Regulatory Guide 185.

Misleading or deceptive conduct

Australian law prohibits misleading or deceptive conduct in a range of circumstances, including in trade or commerce, in connection with financial services, and in relation to a financial product. Care should be taken to ensure promotional communications about an ICO do not mislead or deceive potential investors, and do not contain false information.

Regulatory Guide 234 Advertising financial products and services (including credit): Good practice guidance contains guidance to help businesses comply with their legal obligations to not make false or misleading statements or engage in misleading or deceptive conduct.

Individuals or entities that may be considering an ICO and are not sure whether they may be subject to obligations under the Corporations Act are advised to contact the Innovation Hub to request informal assistance.

ASIC can see the benefits and risks of the ICOs and would be willing to engage those in the area.

This is an excerpt from ASIC’s website at http://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings/

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Why Investors Push Participation Rights on Founders by Kapitalized

Kapitalized article at https://kapitalized.com/blog/investors-push-participation-rights-founders

Why Investors Push Participation Rights on Founders

If you are trying to raise capital you would no doubt have heard of Participation Rights in venture capital financing. These are typically the right to receive the original investment plus share in the remaining proceeds as common shareholders (straight participating) or the more onerous multiple participating structure that gives the investor back a multiple of their investment before the founders see anything and then further allows the investor to share in the remaining proceeds.

What is this means in most startup exits that are not multiples on the original investment is that the Founders and employees with shares can effectively end up with very little or nothing. This is an asymmetric risk, as founders and employees tend to take a pay cut combined with emotional, personal and career risk (these are often forgotten elements at the start of an investment).

Why Accept Participation Rights?

Participation rights are designed to protect venture capital funds, by trying to ensure that they receive their target investment return first, however why do they often try and receive more than just their investment and why shouldn’t they just share the risk with the founders of not getting back their investment? This purely comes down to two key factors:

1) Over reliance by the fund on finding the big ticket Unicorn exit,

2) Lack of competition during the investment round.

On point 1 – VC funds that are looking for the 1-2 ventures in their portfolio that will make substantial returns will look to extract as much as possible from a few investments. VC funds that take less of a Unicorn approach to investment may be better suited as looking for a 20%-30% IRR on their investment (which ironically is probably far better than the vast majority of VC funds’ returns in any case).

On point 2 – Australia has much lower competition than overseas markets due to slow investor processes, poor appetite for risk and a lack of urgency. Poor competition in capital raising rounds allows VC firms to add onerous terms and conditions that effectively can strip the founders of any meaningful returns on exit.

Alternatives

Alternative to participation rights would usually include raising capital direct from private investors or larger corporates (known as Strategic Investors sometimes) that take a longer term outlook and value the investment on a strategic basis. Remember VC funds rarely see strategic value and are effectively short-term investors (even if they exit after 5-7 years their whole strategy is around extracting multiples of their investment).

Convertible notes are an effective capital raising instrument and allows for investors to recoup their investment capital plus a coupon (or interest) plus a discount if converting to equity at a later capital raising. Australian investors have historically not shown significant interest in convertible notes which is a little unusual given their common use in Silicon Valley and European venture funds. This might be due to a lack of sophistication and limited competition to date in venture capital financing in Australia that has allowed funds to take quite onerous terms (compared arguably, to a similar investment in an overseas market).

Capital Raising Process and Negotiation

Look at terms as being equally important as the investment size and valuation – poor terms can leave you with nothing (not to mention when combined with lack of board control, veto rights and low value add that most VCs offer) or very little for your hard work.

Investors will say they need to be rewarded for their risk – the right outcome is a sharing of the risk and the right reward/motivation for founders under a range of possible exit outcomes. Investor favourable investments and terms sound great for the fund but can result in low motivation and implosion of the venture as founders will often walk away when they realise they will get nothing in lower performing venture outcome situations. Ideally you want founders to keep on delivering and even trying to pivot the business under tough situations and possibly delivering value even under adverse business situations.

What can you do as a Founder?

Look at the investment terms, negotiate the whole investment rather than the headline valuation and dollar injection. Look to create a competitive processes and consider alternative instruments.

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Simple Cap Table for an Ordinary Shares Investor by Kapitalized

Kapitalized article at https://kapitalized.com/blog/simple-cap-table-investor-ordinary-shares

Simple Cap Table for an Ordinary Shares Investor

Capitalisation Table

We’ve created a simple Cap Table with an equity (ordinary share) issue to the founders followed by an ordinary share issue to an investor at a later date.

There’s a number of Cap Tables available however many of them deal with more venture capital raisings that include Preferred Stock and Convertible Notes (we’ll deal with those in a separate model later).

Why Ordinary Shares?

Commonly in Australia seed and angel investors invest on a common or ordinary shares basis with the same voting rights as the founders and with no liquidation priority.

This model can be easily adjusted to add multiple founders, employees, options and investors.

When to Use Preferred Stock and Convertible Notes

When you are doing a capital raising from multiple investors consider Convertible Notes, SAFE, Convertible Equity as an alternative to a straight equity issue as they offer advantages in terms of speed of issue and reduced due diligence requirements.

Preferred stock will normally be requested by Venture Capital funds or institutional investors with either non-participating or participating structures and liquidation preferences and liquidation multiples.

Download the Simple Cap Table

Here’s the link to the Simple Cap Table that is free to download and use. Of course, always remember to seek professional advice of course when issuing shares.

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In 2008 We Launched LendingHub One of Australia's First P2P Lenders by Kapitalized

Kapitalized article at https://kapitalized.com/blog/we-launched-australias-first-p2p-lender-lendinghub-2008

In 2008 We Launched LendingHub One of Australia's First P2P Lenders

An Emerging Online Fintech Market in 2008

I’m penning this article as in 2008-2009 I launched one of Australia’s first peer to peer lending platforms called LendingHub which ultimately wasn’t successful it taught me a lot about building a custom technology platform and attempting to tackle a very new alternative disruptive model.

  In 2008 I was working at Fairfax Media in a senior corporate strategy role having recently come from the world of investment banking. Online models and platforms (such as online classifieds, auctions and community forums) were starting to disrupt a number of sectors in Australia particularly traditional news and ad based media. The fintech industry was primarily driving innovation in online brokerage, financial information and starting to hide business news behind subscriber paywalls.

Peer to peer models had started to emerge in the UK, Zopa and the US with LendingClub, Prosper and Kiva (micro loans for entrepreneurs in developing economies). These models were viewed as interesting but risky experiments that wouldn’t gain traction with consumers and ultimately would simply be a breeding ground for scams and low quality borrowers (much like the ICO market is viewed at the moment).

In 2008 it seemed like the Australian banking market was ripe for disruption, the big four banks were pulling in bigger than ever profits, they had not evolved their old-school business lending models and they continued to operate on 1980s technology which depended on a lot of staff, branches and manual processes. A P2P (peer to peer or social lending) platform offered the prospect of lower operating costs, rate transparency through an auction style bidding mechanism and a pure online transaction model that would have been a first in Australia amongst all the financial institutions.

LendingHub Launch and Build

In mid-2008 myself and my co-founder started talking to potential corporate and private investor partners – key sticking points was the disbelief that a P2P model would ever succeed – it was viewed as a fad or trend and early successes in the UK and US where offset by regulatory issues in countries such as Italy.

Without corporate or venture capital backers we bootstrapped the technology build and initial marketing, effectively creating Australia’s first p2p lending platform connecting borrowers looking for personal loans with investors using a rate auction model. On successful funding of a loan the platform would manage the settlement, collection of funds and recurring repayment of loans.

Additional challenges at that time were things such as direct debits from bank accounts still relied on physical signatures (digital signatures were just not accepted) and high transaction costs imposed by the banks (distributed payment technology based on blockchain will take this source of income away from the banks eventually).

We launched the platform at LendingHub.com.au in 2009 and received significant media and TV exposure, however investors showed a complete lack of interest and P2P models still rely on institutional investors to provide the bulk of funds particularly in the early stages.

Eventually LendingHub ran out of funds and alternate players such as Ratesetter and SocietyOne managed to gain institutional acceptance on the back of early entrants.

What we Learnt

Fintech propositions competing against the banks need to be well funded, there’s significant demand for alternate services however trust is a big challenge. The regulatory environment is constantly changing and in Australia tends to work against innovation and new ventures – let’s see how the current new round of crowdfunding legislation works.

For those interested you can see the original pitchdeck for LendingHub from 2008.

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Why we do Due Diligence on Every Transaction by Kapitalized

Kapitalized article at https://kapitalized.com/blog/due-diligence-on-every-transaction

Why we do Due Diligence on Every Transaction

I thought I’d write this post about due diligence (also known as ”DD”) which is the least exciting part of every investment or M&A (Mergers and Acquisitions) transaction. We’ve advised hundreds of investors, buyers and founders of businesses and many hope or ask to skip over due diligence either through light due diligence or completing due diligence post deal.

Invariably these deals that skip detailed, formal and thorough due diligence suffer almost without exception whether the acquisition is small or large e.g. listed public companies.

    Why do Investors, Often Experienced Try and Avoid Due Diligence?

Experienced M&A professionals and investors have seen enough deals to know that due diligence is a mandatory step in any transaction, however I’ve seen many CEOs, CFOs and directors (even of ASX listed companies) ignore acquisition due diligence on the basis that:

It will slow down the acquisition – due diligence easily adds 3 to 8 weeks to any transaction of substance and

It will kill the deal – of course that’s the point, when you find a key issue sometimes you need to walk away from the whole transaction

Due diligence is a difficult process and raises issues that buyers and vendors need to work through and resolve

Wanting to appear to be the ‘white knight’ or friendly buyer in a competitive process – vendors are sophisticated and this just leads to acquiring risky ventures with little upside

The business or sector is well understood, either it’s a Management Buy Out or a competitor  – whilst this may be true to a certain degree, the business has it’s own risks and liabilities

What are the Benefits of a Detailed Due Diligence and Commercial Analysis of the Target Investment?

There’s a multitude of benefits, including ensuring that the vendors disclose everything that may impact the value of the business – not doing so allows for a potential future claim against warranties in the sale agreement. Other benefits include:

Ability to review the detailed financials of the business (not just high-level P&L) to determine if there has been personal owner or non-commercial transactions embedded in the financials.

Reconciling the P&L to the bank statements is a great exercise and often these don’t match.

Understanding the quality of the assets and IP of the business – whether they actually exist or are owned by a third-party.

Legal review of contracts with hidden change of ownership clauses.

Review of customers and clients which may have been boosted prior to the sale and may actually leave or have contracts about to expire.

Understanding what revenues may stay with the vendor and what costs may be burdened on the for sale business – this is a common tactic that is not always evident in initial negotiations

Assessing the staff and determining if some may leave soon after acquisition and require a pay-out or are under-performers left on the books that the vendor is unwilling to deal with before the transaction

How to Manage a Due Diligence Process?

Normally you would involve an M&A Advisor for the commercial due diligence and high level accounting and legal review. Can an accounting firm or lawyer do all the due diligence? Typically no – there’s significant commercial acumen required and from what we’ve seen over the years, accounting and legal professionals have select expertise rather than broad deal and transaction skills.

Due diligence is usually run as a formal process with a timetable and initial due diligence list (see our high level due diligence guide) that evolves rapidly as information is received. It is also common to maintain a Question & Answer (Q&A) list where the buyer asks questions and the vendor identifies the right person at their end to help answer the question. Both the due diligence list and Q&A register often form part of the sales agreement as a schedule.

How Long Does Due Diligence Take?

Allow at least 3 weeks at the very least, due diligence takes time and isn’t about just receiving materials – you will need to read and review each document and identify the hidden and potential issues. Normally it is about working out what key business challenge is being hidden or glossed over. Vendors themselves will struggle to get you all the materials quickly as they should review them before providing – often this whole process takes a month before you even get into detailed Q&A around select specifics.

What about Management Buy-Outs?

In a management buy-out (MBO or LBO, Leveraged Buy-Out) the management team is undertaking the acquisition from the parent company. There’s a perception that due diligence should be quick and light. A few significant issues typically emerge:

Management does not know everything about the business or the legal entities

The deal structure may transfer significant risk to the buyer

Third-party investors are overly reliant on the management team – it is suggested to undertake detailed review to break this reliance

What if Key Issues are Discovered?

Quite simply this is the whole purpose of due diligence and key issues discovery will often trigger a price discussion or a change in the deal terms or simply the buyer should walk away – bad deals lose value quickly and lead to significant disputes.

M&A Due Diligence Checklist

You can see our simplified due diligence checklist here.

Kapitalized – M&A Simplified Due Diligence Checklist

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Overview of Kapitalized Advisory Services Added to SlideShare by Kapitalized

Kapitalized article at https://kapitalized.com/blog/overview-kapitalized-advisory-services-added-slideshare

Overview of Kapitalized Advisory Services Added to SlideShare

Strategy & Advisory Capability

We’ve added an overview of Kapitalized advisory skills and capabilities to SlideShare.

You can see the presentation at https://www.slideshare.net/IvanMantelli/kapitalized-strategy-capability-advisory-overview

Contents

We help early-stage ventures, startups and corporates looking to innovate

Who we help – founders, corporates (boards and CEOs) and investors

What we do – Strategy articulation, execution planning, M&A advisory and financial modelling/analysis

Overview of sample workplans for typical projects

Contact details

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Simple Steps for Preparing your Business for Sale by Kapitalized

Kapitalized article at https://kapitalized.com/blog/simple-steps-preparing-business-sale

Simple Steps for Preparing your Business for Sale

After years of hard work and dedication to your business, you’ve decided it’s time to let someone else take over the reigns. Although you’re an expert at growing a good idea into a thriving company, do you know how to prepare your business for the sales market? Achieving the goal of a satisfied buyer and a victorious seller can be difficult, but with preparation, evaluation, insight you can eliminate the element of luck and maximize your sale price.

First consider if you’re really ready to let go. For many, selling a business that they’ve poured blood, sweat and tears into can be an emotional decision. Although successful business owners will have anticipated and prepared for many of their industry’s ups and downs, they may not feel equipped to handle the eventual sale of the business they’ve fostered. Experts agree that selling a business is not for the faint-hearted. Consider enlisting the help of an attorney or financial expert to help you evaluate if you and your business are ready to part ways.

Timing is important. Unfortunately, many who decide to sell their business are forced to do so. Physical disability is a common reason for such an exit. According to Smallbusinessreview.com, 25-33% of American small business owners will be forced to leave their business due to a disability. A condition that continues for more than a few months could likely result in a long-term impact on your company. If you decide to sell, do so quickly while you are healthy and business is robust and you have time to plan the exit. You want to be in control of the outcome.

Is your business fit? Start with reviewing business records to make sure they are complete, accurate and inclusive. Check customer and supplier contracts to see which ones will be expiring soon. Then consider which business accounts are ineffective or draining on your resources and eliminate them. Once you have everything in order, prepare financial statements and projections that will demonstrate your business’ growth and revenue potential. Financial transparency will assure buyers your business is what you say it is.

Will your business show well to buyers? Successful home sales are largely dependent upon “curb appeal” and businesses are no different. If your block-and-mortar building or your Internet website needs an update, now is the time to do it. Rusty tools, out-dated equipment, cob webs and peeling paint: they all speak negatively to a buyer. Invest a small amount of money now to ensure a greater selling price later.

Set your asking price – but not before doing your homework. Many sellers tend to over-value their assets, so it might be wise to get your business appraised by a certified business appraiser or valuation analyst. These professionals will consider all tangible assets, including real estate, cash, inventory – even intellectual property, client lists and trademarks.

Now you’re ready to find a buyer. Some business owners start out working independently to market and sell their business. Eventually, most realize they need assistance from a professional service, such as a broker and the they’ll need to advertise their business to potential buyers, which can be done on a number of brokerage sites or marketplace (such as Flippa.com) for the buying and selling of private businesses, opportunities and franchises.

With these helpful tips its time to start planning and preparing to recoup the rewards of your hard work and investment in your business!

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ASIC's Moneysmart Guide to P2P Lending by Kapitalized

Kapitalized article at https://kapitalized.com/blog/asic-moneysmart-guide-to-p2p-lending

ASIC's Moneysmart Guide to P2P Lending

Peer to Peer lending

Marketplace lending

Peer to peer lending matches people who have money to invest with people who are looking for a loan. A more appropriate term for this practice is marketplace lending because an online platform, usually a website, is used to match investors with borrowers.

Even though the term marketplace lending best describes this type of lending, on this page we refer to it as peer to peer lending (or P2P lending) as these are the terms most people use.

For both investors and borrowers, there are a number of things to consider before using this type of lending.

How does peer to peer lending work?

Peer to peer lending for investors

Key risks of peer to peer lending

Peer to peer lending for borrowers

How does peer to peer lending work?

Peer to peer lending involves borrowing money without going through a traditional lender such as a bank, building society or credit union. It can be used by individuals or companies that need a personal or business loan.

The money comes from investors who can be individuals or companies.

People who invest through this type of lending are buying a financial product, typically a managed investment product; while borrowers are taking out a loan that is repaid over time, with interest.

P2P lending sites and companies

P2P lending involves a financial service provider (the lending platform) that acts as an intermediary between investors and borrowers.

The platform will promote itself to both borrowers and investors, and makes money by charging fees to both parties.

Interest rates

Investors may be attracted to this type of lending because of the interest rate they are offered for their investment. Borrowers may choose to get a loan this way because it may offer loans with lower interest rates than they can get from a traditional lender.

Interest rates and the methodology for calculating interest may vary among the lending platforms.

Matching investors with borrowers

An investor decides how much they want to invest and, depending on the lending platform, how their money will be used. For example, an investor may be able to choose to fund one loan in particular or be able to invest in a portfolio of loans. In addition to this, investors may be able to choose the minimum interest rate and select a loan period that fits their needs.

However, in some cases, the investment decisions will be made by the platform operator or the investment manager.

Repayments from borrowers are collected through the lending platform and passed on to the relevant investors at predetermined intervals. The investor’s capital can be returned as part of the repayments or at the end of the loan period.

When borrowers apply for a loan, the platform operator will evaluate their suitability by checking their credit history and their capacity to repay the loan. These factors allow the platform operator to assess the lending risk. Not all platforms disclose the lending risk of each borrower.

The platform operator keeps the personal details of all investors and borrowers confidential.

Peer to peer lending for investors

Generally, P2P lending platforms are set up as managed investment schemes. This means the platform operator must have an Australian Financial Services Licence (AFSL) that allows them to run the scheme and must comply with the Corporations Act when they provide the product.

Things to check

Before you invest, you should check ASIC Connect’s Professional Registers to see if the lending platform holds an AFSL. You can also check ASIC Connect within the ‘organisation and business names search’ to see if a scheme is registered with ASIC. Registered schemes will have an Australian Registered Scheme Number (ARSN) that can also be searched.

The platform’s website should have the details of the scheme registration and AFSL. If the platform lends to consumers it should also have details of its Australian Credit Licence.

Understand the investment

Before you hand over your money always read the product disclosure statement (PDS). In the PDS, look for information about these features:

Security – Are the loans secured or unsecured?

Interest rate – How is the interest rate determined and by whom?

Choice of loans – Can you select the loans and/or borrowers? Can your investment be spread over more than one loan? (This may reduce the risk of losing all your money.)

Repayments – How long will it take before you get any money back?

Getting your money back – Do you have any cooling off rights if you change your mind? Do you have the ability to redeem your investment and get your money back?

What happens if the borrower defaults – What will the platform do to recover your investment? Who pays the expenses associated with any recovery action?

What if the platform fails – What will happen if the platform operator becomes insolvent or goes into external administration?

Fees – Are there any fees payable to the platform operator? Is there a fee when you invest as well as a fee for handling repayments or accessing your money early?

If you don’t understand or feel comfortable with these features, consider investing in other financial products.

You should also consider whether investing in a P2P lending loan suits your investment goals. See invest smarter for our tips on matching an investment with your needs and objectives.

Important: Have you read the PDS?

Before you commit your money to a P2P lending loan make sure you read the PDS and understand the significant features, benefits, costs and risks of the investment.

Key risks of peer to peer lending

This section explains some of the common risks of P2P lending. Each lending platform is unique, so you should read the relevant section of the PDS for the specific risks of the platform that you are considering investing through.

Lending risk

In most cases, the company operating the lending platform does not lend its own money, so all the lending risk is taken by investors. This means you are likely to lose some or all of your money if the borrower does not repay their loan.

This risk is reflected in the comparatively high returns you are likely to receive for your investment. However, it pays to remember that you may still lose your money even if you choose a loan that has been listed as low risk.

See risk and return for more information about assessing your appetite for investment risk.

Assessing credit risk

The operators of P2P lending platforms often make claims about a borrower’s ability to repay the loan. The operators may also rate or grade borrowers by their level of creditworthiness.

It’s important to keep in mind that these ratings are based on a point in time assessment only and are not the same as the ratings used by an external credit rating agency or even consistent with the ratings used by other P2P lending platforms.

Before you invest you should understand and feel comfortable with how borrowers are assessed before they are given a loan. The PDS should explain how this is done.

Warning

Credit assessment is a highly skilled and complex process. You are relying on the platform operator to assess and rate a borrower, not an external credit rating agency. A high number of defaults or late repayments by borrowers could be an indicator of the platform operator’s poor credit assessment process. Ask the operator for information about its track record of assessing borrowers.

What if the borrower can’t repay the loan?

It’s important to remember that a borrower’s ability to meet repayments can change over time (for example, because of illness, unemployment or a change in their financial circumstances). If a borrower can’t keep up the repayments, they have the right to apply for a ‘hardship variation’. This can involve a change to the terms of their loan such as changing the amount or timing of their repayments.

If you have invested in a loan that is the subject of a hardship variation this may mean the term of your investment is extended and your returns may be less than originally expected.

Borrowers also have the right to complain to an external dispute resolution (EDR) scheme if they are not happy with how the platform operator has responded to their request for a hardship variation.

The cost of assessing a complaint is charged to the platform operator regardless of the outcome. This means the operator will have to pay the scheme’s fees (which can range from a few hundred to several thousand dollars), as well as any compensation awarded by the EDR scheme to the borrower. As an investor, you should check to see how the lending platform will recover these costs.

Investments in P2P lending are not deposits

Investing through a P2P lending platform is not the same as putting your money in a deposit account with a bank, building society or credit union. The Government guarantee on deposits that applies to savings products such as a term deposit does not apply to funds invested in peer to peer lending.

In addition to this, if your investment is lost due to fraud or an error within the lending platform, there may not be a procedure in place to compensate you.

Compensation

Some platforms do maintain a fund that may compensate investors that suffer losses due to borrower defaults. However, if there are a large number of defaults, the fund is unlikely to have enough money to compensate all investors.

Make sure you understand how you will be compensated if the loan is not repaid and how claims against defaults are made and assessed.

How to complain

As an AFSL holder, the operator of the lending platform must have a complaints handling procedure and must respond to any complaints. You can find out how to complain by reading the PDS or by contacting the platform operator.

If you are not satisfied with their response you can take the matter to an external dispute resolution (EDR) scheme. Details about which scheme the platform operator belongs to should be in the PDS.

Peer to peer lending for borrowers

Most loans organised by P2P lending platforms are used by borrowers to consolidate debts, to fund large purchases such as cars, or for business purposes. However, it is possible to get larger loans to buy property or refinance a mortgage.

Like a loan from a more traditional lender, borrowers pay back the amount of the loan, plus interest. However, interest rates may be lower than the rates offered by traditional lenders. This is because borrowers can get interest rates based on their personal circumstances, such as their credit rating.

Some lending platforms keep a fund of money that it can use to compensate investors who suffer losses due to borrower defaults. Borrowers may be asked to pay a fee that will be paid into that fund. The fee will depend on the creditworthiness of the borrower.

Applying for a loan

Like all credit providers who offer consumer loans, P2P lending platforms must lend responsibly.

If you are applying for a loan through a lending platform, you should expect to be asked the same questions that a traditional lender will ask to assess your suitability for the loan and your ability to repay it.

The lending platform will also check your credit report. See credit reports for more information about what’s included in your credit report.

Credit providers

The credit provider for your loan will be either the platform operator or a custodian company that enters all loans on behalf of the platform and the investors.

If you have difficulties repaying your loan, you will be dealing with the platform operator or the custodian company, rather than the investors.

For individual borrowers (not businesses) the loan will be a consumer credit contract, so the platform operator will need to have an Australian Credit Licence and comply with the National Credit Act when it sets up the loan.

Before you sign up for a loan

Before you sign up for a personal loan through a P2P lending platform you should always read the information on their website and any loan documents to make sure you understand the terms and conditions of the loan.

To help you assess the loan, take a look at the comparison rate to see how much the loan is likely to cost you with the fees included. You should also check whether you will need to pay any upfront fees to set up the loan.

It’s also important to shop around and compare the marketplace loan with the loans being offered by traditional lenders.

If things go wrong

When you sign up for a loan, you will be given a credit guide that explains who the credit provider is, and what the platform operator does. This guide will tell you who you should contact if you have any complaints, or if you have problems repaying the loan.

The credit guide will also include details of the external dispute resolution (EDR) scheme you can contact if a dispute with the P2P lender cannot be resolved. For more information about lodging a complaint, see how to complain.

P2P lending might seem like a good way to get better returns as an investor or a lower interest rate as a borrower, however, there are a number of things to check before you hand over your money or sign up for a loan.

This article has been reprinted from https://www.moneysmart.gov.au/investing/managed-funds/peer-to-peer-lending and has been provided to help investors and entrepreneurs source correct information on p2p lending.

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Introducing GoWell Health Connecting You to Chiropractors On Demand by Kapitalized

Kapitalized article at https://kapitalized.com/blog/introducing-gowell-health-connecting-chiropractors

Introducing GoWell Health Connecting You to Chiropractors On Demand

Kapitalized is Working with Go Well Health a New Startup in the Allied Health Space

Kapitalized is helping an early stage venture called GoWell Health with business development, financial modelling and launch execution.

GoWell is a mobile based platform that connects consumers in need of remedial help with allied health professionals such as chiropractors, physiotherapists, osteopaths and other health professionals.

You can see the GoWell website here.

The Opportunity

The Allied Healthcare market is fragmented, large and reports over 120 million bookings annually, mostly through 1-2 person businesses.

Chiros and physios typically rely on word of mouth to generate business and have limited time and resources to drive new customers and repeat bookings, unlike the larger medical centres in the GP and dentistry sectors.

What is Unique About the GoWell Health Model?

GoWell is a no risk proposition for health practitioners delivering new customers and revenues on a pay for success model unlike traditional directory models that either use a pay per lead or monthly subscription.

For consumers GoWell Health will be the only on demand booking platform in the Australian market when launched.

Video – How GoWell Health Works for Consumers

https://youtu.be/COSnSCGB5cw

  Seed Funding and Partnerships

GoWell Health is looking for seed funding and early stage partners in the Allied health and health sectors that can add value through driving consumers and patients and have connections with health professionals.

How to get in touch

Contact Jakomi Mathews, Founder at jakomi@gowell.co (see the founder’s profile at https://www.linkedin.com/in/jakomimathews) for product demos and discuss the technology or Ivan Mantelli at ivan@kapitalized.com to see the pitchdeck.

[kapitalized-blog]

Choosing the Right Advisor - M&A Advisor vs. Business Broker

At Kapitalized we call ourselves ‘M&A Advisors’ (Mergers & Acquisitions) while others often call themselves ‘business brokers’.  We have been asked several times recently what is the difference between the two so I thought it was worth explaining the key differences and benefits of using an M&A advisor for strategic asset sales.

For most business owners selling your business is one of the most significant events in your life and is often a very complex and stressful process.  You will invest alot of time and effort in achieving the highest price for your business (and hence the greatest return for one of your largest investments), so it is extremely important that you engage the right advisors to negotiate this complex transaction and maximise the sale value for you.

Business brokers generally specialise in selling “main street”or retail businesses in their immediate geographical location (these are sometimes called “mom and pop” stores).  Businesses sold by business brokers are individual franchise stores, convenience and fast food outlets, smaller retail shops, beauty and hairdresser shops and mechanics.  These businesses are often valued under $2million and owned by individuals or families who work in the business full-time.  These businesses will most likely be bought by owner-managers who will likely run the business full-time.

Most business broker are real estate agents who will normally sell the business via ‘business for sale’ websites and have a limited capacity to do very little targeted marketing.

Alternatively, M&A Advisors are often investment bankers with MBA type degrees and specialise in strategy, financial structuring and negotiating complex business transactions and valuing longer-term business potential.

M&A Advisors are engaged to sell businesses to strategic buyers such as larger organisations in the same or similar industry (called a Trade Sale), private equity firms and other often more sophisticated investors.  These transactions are usually more complex, the buyers are more sophisticated and resourced, the range of potential outcomes is broader and the consequences of getting it wrong greater. These businesses may also have ‘hold-back’ clauses and ‘earn-outs’ to align performance with the price paid for the business.

Typically M&A advisors will undertake financial modelling of the business, prepare cashflow forecasts, develop a standalone valuation of the enterprise and draft business information memorandum. At Kapitalized we also do vendor and buyer due diligence and help draft the commercial terms of sale and purchase agreements.

Businesses engaged by M&A Advisors may have a management team that manages the business separate to the owner and there will nearly always be some middle-management.

M&A Advisors will market the business by direct targeted marketing to strategic industry players and often 5-10 key players are targeted initially. This list is reduced to a few key bidders which creates competitive tension in the sale process.

As an example in 2015 we advised the founder and owner of Ben & Jerry’s Openair Cinemas on their long-term strategy and ultimately sale and exit to Fairfax Media’s events division. 

If your business is small and highly localised you may consider a business broker otherwise consider using M&A advisory services as these will align with your vision for th business and the potential buyer. 

Contact us at Kapitalized M&A Advisory to discuss the process in more detail.

[kapitalized-blog]

Ivan Mantelli founder of Kapitalized provides strategy advisory to startups and early stage ventures. Speciliased in eCommerce, online marketplaces, digital enabled businesses, fintech and healthtech.

[kapitalized-blog]

Raise Capital with Convertible Notes

Convertible Notes are an innovative financing mechanism for Australian ventures and corporates. At Kapitalized we specialise in convertible notes and arranging the commercial terms for issuers (startups and SMBs looking for capital) and investors (buyers of the convertible notes).

How do Convertible Notes Work?

A Convertible Note or Convertible Bond is an investment mechanism often used by venture capital and seed investors investing in startups who wish to delay establishing a valuation for that startup until a later round of funding or milestone.

Convertible notes are structured as loans with the intention of converting to equity. The outstanding balance of the loan is automatically converted to equity at a specific milestone, often at the valuation of a later funding round. In order to compensate the investor for the additional risk of investing in the earlier round, convertible notes will sometimes have additional clauses, such as caps or discounts.

Advantages of Convertible Notes

The primary advantage of issuing convertible notes is that it does not force the issuer and investors to determine the value of the company when there really might not be much to base a valuation on – in some cases the company may just be an idea. That valuation will usually be determined during the Series A financing, when there are more data points off which to base a valuation.

Valuation Cap

A valuation cap in a convertible note is a bonus for investment risk. The Valuation Cap places a cap on the price at which the notes convert into equity and provides convertible note holders with equity-like upside if the company takes off out of the gate without excessive dilution.

Faster Access to Capital

Convertible notes are a faster way of funding a venture, they require much simpler documentation (see the Tools section for a sample termsheet) and much quicker and simpler due diligence. The primary question for the investor is will the company be able to repay the loan within 1-2 years usually from a refinancing or equity issue round or will they grow so fast that the valuation skyrockets and the notes convert into equity.

Starting a Con. Note Capital Raising

At Kapitalized we’ve developed a process to help entrepreneurs access convertible notes funding. Contact us about Convertible Notes to discuss starting a the commercial process.

[kapitalized-blog]

Advisory for Startups

Kapitalized helps startups and early-stage ventures through strategy and capital advisory. 

We help founders and investors develop strategic plans for their businesses to help achieve growth targets, compete against aggressive competitors, win market share and build recognisable brands.

What we do best:

Financial modelling for ventures

Mergers and acquisitions advisory

Strategic planning

Transformation and business pivots

Businesses grow through concerted effort and focusing on key revenue drivers. At Kapitalized we can help work with you to generate this focus.

[kapitalized-blog]

5 Secrets for perfect running small design studio by Kapitalized

Kapitalized article at https://kapitalized.com/blog/something

5 Secrets for perfect running small design studio

Graphic design is the methodology of visual communication, and problem-solving through the use of type, space and image. The field is considered a subset of visual communication and communication design, but sometimes the term “graphic design” is used interchangeably with these due to overlapping skills involved. Graphic designers use various methods to create and combine words, symbols, and images to create a visual representation of ideas and messages. A graphic designer may use a combination of typography, visual arts and page layout techniques to produce a final result. Graphic design often refers to both the process (designing) by which the communication is created and the products (designs) which are generated.

Common uses of graphic design include identity (logos and branding), publications (magazines, newspapers and books), print advertisements, posters, billboards, website graphics and elements, signs and product packaging. For example, a product package might include a logo or other artwork, organized text and pure design elements such as images, shapes and color which unify the piece. Composition is one of the most important features of graphic design, especially when using pre-existing materials or diverse elements.

During the Tang Dynasty (618–907) between the 7th and 9th century AD, wood blocks were cut to print on textiles and later to reproduce Buddhist texts. A Buddhist scripture printed in 868 is the earliest known printed book. Beginning in the 11th century, longer scrolls and books were produced using movable type printing making books widely available during the Song dynasty (960–1279). Sometime around 1450, Johann Gutenberg’s printing press made books widely available in Europe. The book design of Aldus Manutius developed the book structure which would become the foundation of western publication design. This era of graphic design is called Humanist or Old Style.

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Revolutionary apps by Kapitalized

Kapitalized article at https://kapitalized.com/blog/revolutionary-apps

Revolutionary apps

The term “app” is a shortening of the term “application software”. It has become very popular and in 2010 was listed as “Word of the Year” by the American Dialect Society. In 2009, technology columnist David Pogue said that newer smartphones could be nicknamed “app phones” to distinguish them from earlier less-sophisticated smartphones.

Mobile apps were originally offered for general productivity and information retrieval, including email, calendar, contacts, and stock market and weather information. However, public demand and the availability of developer tools drove rapid expansion into other categories, such as mobile games, factory automation, GPS and location-based services, banking, order-tracking, ticket purchases and recently mobile medical apps. The explosion in number and variety of apps made discovery a challenge, which in turn led to the creation of a wide range of review, recommendation, and curation sources, including blogs, magazines, and dedicated online app-discovery services. Recently, government regulatory agencies have launched initiatives to regulate and curate apps, particularly mobile medical apps.

Popularity

The popularity of mobile apps has continued to rise, as their usage has become increasingly prevalent across mobile phone users. A May 2012 comScore study reported that during the previous quarter, more mobile subscribers used apps than browsed the web on their devices: 51.1% vs. 49.8% respectively. Researchers found that usage of mobile apps strongly correlates with user context and depends on user’s location and time of the day.

According to market research firm Gartner, 102 billion apps will be downloaded in 2013 (91% of them will be free) but they will still generate US$26 billion, up 44.4% on 2012’s US$18 billion. An analyst report estimates that the app economy creates revenues of more than €10 billion per year within the European Union, while over 529,000 jobs have been created in 28 EU states due to the growth of the app market.

Top 5 apps

Banlastic app

Hero Guru

CallMe Out app

Wedding Planner 2.0

Sale farm

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Creative retouching by Kapitalized

Kapitalized article at https://kapitalized.com/blog/creative-retouching

Creative retouching

In digital editing, photographs are usually taken with a digital camera and input directly into a computer. Transparencies, negatives or printed photographs may also be digitized using a scanner, or images may be obtained from stock photography databases. With the advent of computers, graphics tablets, and digital cameras, the term image editing encompasses everything that can be done to a photo, whether in a darkroom or on a computer. Photo manipulation is often much more explicit than subtle alterations to color balance or contrast and may involve overlaying a head onto a different body or changing a sign’s text, for examples. Image editing software can be used to apply effects and warp an image until the desired result is achieved. The resulting image may have little or no resemblance to the photo (or photos in the case of compositing) from which it originated. Today, photo manipulation is widely accepted as an art form.

There are several subtypes of digital image-retouching:

Technical retouching

Manipulation for photo restoration or enhancement (adjusting colors / contrast / white balance (i.e. gradational retouching), sharpness, noise, removing elements or visible flaws on skin or materials, …)

Creative retouching

Used as an art form or for commercial use to create more sleek and interesting images for advertisements. Creative retouching could be manipulation for fashion, beauty or advertising photography such as pack-shots (which could also be considered inherently technical retouching in regards to package dimensions and wrap-around factors). One of the most prominent disciplines in creative retouching is image compositing. Here, the digital artist uses multiple photos to create a single image. Today, 3D computer graphics are used more and more to add extra elements or even locations and backgrounds. This kind of image composition is widely used when conventional photography would be technically too difficult or impossible to shoot on location or in studio.

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Work with comfort by Kapitalized

Kapitalized article at https://kapitalized.com/blog/work-with-comfort

Work with comfort

n the past, interiors were put together instinctively as a part of the process of building. The profession of interior design has been a consequence of the development of society and the complex architecture that has resulted from the development of industrial processes. The pursuit of effective use of space, user well-being and functional design has contributed to the development of the contemporary interior design profession.

In ancient India, architects used to work as interior designers. This can be seen from the references of Vishwakarma the architect – one of the gods in Indian mythology. Additionally, the sculptures depicting ancient texts and events are seen in palaces built in 17th century India.

Throughout the 17th and 18th century, and into the early 19th Century, interior decoration was the concern of the homemaker or, an employed upholsterer or craftsman who would advise on the artistic style for an interior space. Architects would also employ craftsmen or artisans to complete interior design for their buildings.

  Commercial interior design & management

In the mid- to late-19th century, interior design services expanded greatly, as the middle class in industrial countries grew in size and prosperity and began to desire the domestic trappings of wealth to cement their new status. Large furniture firms began to branch out into general interior design and management, offering full house furnishings in a variety of styles. This business model flourished from the mid-century to 1914, when this role was increasingly usurped by independent, often amateur, designers. This paved the way for the emergence of the professional interior design in the mid-20th century.

Illustrated catalog of the James Shoolbred Company, published in 1876.

In the 1850s and 1860s, upholsterers began to expand their business remits. They framed their business more broadly and in artistic terms and began to advertise their furnishings to the public. To meet the growing demand for contract interior work on projects such as offices,hotels, and public buildings, these businesses became much larger and more complex, employing builders, joiners, plasterers, textile designers, artists, and furniture designers, as well as engineers and technicians to fulfil the job. Firms began to publish and circulate catalogswith prints for different lavish styles to attract the attention of expanding middle classes.

As department stores increased in number and size, retail spaces within shops were furnished in different styles as examples for customers. One particularly effective advertising tool was to set up model rooms at national and international exhibitions in showrooms for the public to see. Some of the pioneering firms in this regard were Waring & Gillow, James Shoolbred, Mintons and Holland & Sons. These traditional high-quality furniture making firms began to play an important role as advisers to unsure middle class customers on taste and style, and began taking out contracts to design and furnish the interiors of many important buildings in Britain.