Briefing Paper

Being Part of the Crowd: Mini-ďŽŶĚƐ͕ ĐƌŽǁ ĚĨƵŶĚŝŶŐĂŶĚĂůƚĞƌŶĂƟǀ Ğ financing for franchise growth

July 2015

Brussels / Dü sseldorf / Hamburg / London / Manchester / Munich / Paris / Shanghai / Silicon Valley / ϐ‹‡Ž†ϐ‹•Š‡”Ǥ ‘  Being Part of the Crowd: Mini-bonds, crowdfunding and alternative ϐ‹ƒ ‹‰ˆ‘”ˆ”ƒ Š‹•‡‰”‘™ –Š

The development and growth of franchise networks relies on the  there is much greater flexibility in the terms upon which the availability of accessible funding. When a business is ready to funds are raised and their purpose. expand – whether organically and through a franchise model – it ƌĞƋƵŝƌĞƐĐĂƉŝƚĂůĞŝƚŚĞƌƚŽŝŶǀ ĞƐƚŝŶŝƚƐŽǁ ŶĂĚĚŝƟŽŶĂůƐŝƚĞƐ͕ ŽƌƚŽ How do mini-bonds work? ĚĞǀ ĞůŽƉŝƚƐĨƌĂŶĐŚŝƐĞŝŶĨƌĂƐƚƌƵĐƚƵƌĞƐƵĐŚĂƐǁ ƌŝƟŶŐŝƚƐŽƉĞƌĂƟŽŶƐ manual, preparing the necessary legal documents and franchisee Mini-bonds are small units of debt issued by a company. Subject recruitment programme. ƚŽĐĞƌƚĂŝŶĞƐƐĞŶƟĂůĐŚĂƌĂĐƚĞƌŝƐƟĐƐ͕ ƚŚĞƚĞƌŵƐŽĨƚŚĞĚĞďƚĐĂŶďĞ tailored to the requirements of the issuing company. They are ^ŝŵŝůĂƌůLJ͕ ƉƌŽƐƉĞĐƟǀ ĞĨƌĂŶĐŚŝƐĞĞƐƌĞƋƵŝƌĞĨƵŶĚŝŶŐƚŽƉƵƌĐŚĂƐĞĂ ǀ ĞƌLJƐŝŵŝůĂƌƚŽĂĐŽŶǀ ĞŶƟŽŶĂůƌĞƚĂŝůďŽŶĚ͕ ĞdžĐĞƉƚƚŚĞLJĂƌĞŶŽƚ ĨƌĂŶĐŚŝƐĞĂŶĚŵĂŬĞƚŚĞŶĞĐĞƐƐĂƌLJŝŶŝƟĂůŝŶǀ ĞƐƚŵĞŶƚƐŝŶŝƚ͘  listed on the London Stock Exchange and are commonly not ZĞƐƚƌŝĐƚĞĚĂĐĐĞƐƐƚŽƚƌĂĚŝƟŽŶĂůƐŽƵƌĐĞƐŽĨĨƵŶĚŝŶŐŝŶƌĞĐĞŶƚLJĞĂƌƐ transferable. ŚĂƐƐĞĞŶĂŐƌŽǁ ƚŚŝŶĂůƚĞƌŶĂƟǀ ĞĮ ŶĂŶĐĞƐŽƵƌĐĞƐĨŽƌŶĞǁ ĨƌĂŶĐŚŝƐĞ ďƵƐŝŶĞƐƐĞƐĂŶĚǀ ĞŶƚƵƌĞƐ͘ /ŶƉĂƌƟĐƵůĂƌ͕ ƚŚĞƌĞŚĂƐďĞĞŶŐƌŽǁ ƚŚŝŶ two areas; mini-bonds and crowdfunding. hŶĚŽƵďƚĞĚůLJƚŚĞƐĞĂůƚĞƌŶĂƟǀ ĞĮ ŶĂŶĐĞƐŽƵƌĐĞƐŽī ĞƌƚŚĞĨƌĂŶĐŚŝƐĞ sector a real opportunity for growth but it is important that both ƚŚĞĨƌĂŶĐŚŝƐŽƌĂŶĚĨƌĂŶĐŚŝƐĞĞĂƉƉƌĞĐŝĂƚĞŚŽǁ ƚŚĞƐĞĂůƚĞƌŶĂƟǀ Ğ Į ŶĂŶĐŝŶŐƐǁ ŽƌŬĂŶĚƚŚĞƉŽƚĞŶƟĂůĐŽŶƐĞƋƵĞŶĐĞƐŽĨƵƐŝŶŐƚŚĞŵ͘ 

Mini-bonds

Mini-ďŽŶĚƐĂƌĞĂŶŝŶŶŽǀ ĂƟǀ ĞĂŶĚƌĞůĂƟǀ ĞůLJůŽǁ ĐŽƐƚǁ ĂLJĨŽƌh< privately owned companies to raise funds from UK investors. The corporate mini-ďŽŶĚŵĂƌŬĞƚŚĂƐŐƌŽǁ ŶĚƌĂŵĂƟĐĂůůLJŝŶƚŚĞůĂƐƚ ĨĞǁ LJĞĂƌƐ͕ ĂƐĐŽŵƉĂŶŝĞƐƐĞĂƌĐŚĨŽƌĂůƚĞƌŶĂƟǀ ĞŵĞƚŚŽĚƐƚŽƌĂŝƐĞ funds. The mini-bonds are created by way of a legal instrument, and Žī ĞƌĞĚƚŽƚŚĞh<ƉƵďůŝĐďLJǁ ĂLJŽĨĂŶΗŝŶǀ ŝƚĂƟŽŶĚŽĐƵŵĞŶƚΗ͘  ‡›ˆ‡ƒ–—”‡•ƒ†„‡‡ϐ‹–•‘ˆ ‹‹-bonds Within the limits set out below, there is scope for the mini-bonds to be structured so they suit the requirements of the issuing With mini-bonds, an investor makes an investment in a company company. For example, the issuing company can set repayment in exchange for a "bond" – which is a form of loan. In return for terms, interest levels, and whether interest will be paid in cash or lending money to the company the investor receives regular by way of products or services. It is not uncommon for the interest payments and repayment of the principal sum at the end ŝƐƐƵŝŶŐĐŽŵƉĂŶLJƚŽŽī ĞƌŝŶĐĞŶƟǀ ĞƐĂůŽŶŐƐŝĚĞĐĂƐŚŝŶƚĞƌĞƐƚ͕ ƐƵĐŚ of the term of the bond. So for example, a company may offer a 4 as credits that can be used to pay for in-store items or discounted year bond providing 8% interest. electricity rates.

Whether it is a franchisor or a franchisee that is seeking funding, There are two legal regimes that apply to the bond offer; the mini-ďŽŶĚƐŽī ĞƌƐŽŵĞĂƩ ƌĂĐƟǀ ĞďĞŶĞĮ ƚƐŽǀ ĞƌƚƌĂĚŝƟŽŶĂůĨƵŶĚŝŶŐ ƉƌŽƐƉĞĐƚƵƐƌĞŐŝŵĞĂŶĚƚŚĞĮ ŶĂŶĐŝĂůƉƌŽŵŽƟŽŶƐƌĞŐŝŵĞ͘ ŽƉƟŽŶƐ͗ Mini-ďŽŶĚƐĂƌĞĐůĂƐƐĞĚĂƐΗƐĞĐƵƌŝƟĞƐΗ͘ K ƌĚŝŶĂƌŝůLJ͕ ĂŶLJŽī ĞƌŽĨ  ĂŶŽƉƉŽƌƚƵŶŝƚLJƚŽƌĂŝƐĞŵƵĐŚŶĞĞĚĞĚĐĂƉŝƚĂůǁ ŝƚŚŽƵƚĚŝůƵƟŶŐ ƚƌĂŶƐĨĞƌĂďůĞƐĞĐƵƌŝƟĞƐƚŽƚŚĞƉƵďůŝĐƌĞƋƵŝƌĞƐƚŚĞƉƵďůŝĐĂƟŽŶŽĨĂ prospectus which has been pre-approved by the Financial equity ownership of the franchise company – the shareholders ŽŶĚƵĐƚƵƚŚŽƌŝƚLJ͘ dŚĞƉƌĞƉĂƌĂƟŽŶŽĨĂƉƌŽƐƉĞĐƚƵƐŝƐĂĐŽƐƚůLJ remain unchanged; ĂŶĚƟŵĞĐŽŶƐƵŵŝŶŐƉƌŽĐĞƐƐƐŽ͕ ƚŽĂǀ ŽŝĚƚŚŝƐ͕ ŵŝŶŝ-bonds are  funds can be raised without incurring the costs and delay usually not transferable in any circumstances. Making the mini- associated with an issue of shares; bond non-transferable is sufficient to bring a mini-bond offer  ƚŚĞƌĞŝƐŶŽƌĞƐƚƌŝĐƟŽŶŽŶƚŚĞƐŝnjĞŽĨĨƵŶĚƌĂŝƐŝŶŐ͖ outside the prospectus regime. Note, however, that it is possible  mini-bonds are typically offered by more established franchise to offer transferrable mini-bonds, provided the total amount businesses – typically either the franchisor looking to expand sought under the offer is restricted to less than €5 million. ŽƌĂŶĞƐƚĂďůŝƐŚĞĚĨƌĂŶĐŚŝƐĞĞůŽŽŬŝŶŐƚŽĨƵŶĚƚŚĞĂĐƋƵŝƐŝƟŽŶŽĨ ĂĚĚŝƟŽŶĂůĨƌĂŶĐŚŝƐĞƐ͖ ǀ ĞŶƚŚŽƵŐŚŶŽƉƌŽƐƉĞĐƚƵƐŝƐƌĞƋƵŝƌĞĚ͕ ĂůůĐŽŵŵƵŶŝĐĂƟŽŶƐ ƉƌŽŵŽƟŶŐƚŚĞŽī Ğƌǁ ŝůůďĞƌĞŐĂƌĚĞĚĂƐΗĮ ŶĂŶĐŝĂůƉƌŽŵŽƟŽŶƐΗ͘   the publicity generated by the offer of mini-bonds increases hŶĚĞƌƐĞĐƟŽŶϮϭŽĨƚŚĞ&ŝŶĂŶĐŝĂů^Ğƌǀ ŝĐĞƐĂŶĚD ĂƌŬĞƚƐĐƚϮϬϬϬ͕  awareness of the company's brand and products and services; ŶŽĮ ŶĂŶĐŝĂůƉƌŽŵŽƟŽŶŵĂLJďĞŝƐƐƵĞĚƵŶůĞƐƐŝƚŝƐŝƐƐƵĞĚŽƌ  mini-bonds are a great way to involve customers, clients or approved by an FCA authorised person. It is very likely that there fans in the development or growth of the issuing company; ǁ ŝůůďĞŶŽĞdžĞŵƉƟŽŶĂǀ ĂŝůĂďůĞŝŶƚŚĞĐĂƐĞŽĨĂďŽŶĚŽī ĞƌŽƉĞŶƚŽ  they provide access to non-bank finance; and the general public and accordingly, an FCA authorised person ŵƵƐƚĂƉƉƌŽǀ ĞƚŚĞŝŶǀ ŝƚĂƟŽŶĚŽĐƵŵĞŶƚĂŶĚĂůůƌĞůĂƚĞĚ ƉƌŽŵŽƟŽŶĂůŵĂƚĞƌŝĂůĂƐĮ ŶĂŶĐŝĂůƉƌŽŵŽƟŽŶƐ͘

1 /ĨĂĐŽŵƉĂŶLJǁ ĞƌĞŝŶĂƉŽƐŝƟŽŶǁ ŚĞƌĞŝƚŚĂĚƚŽƉƵďůŝƐŚĂ Equity investors, depending on the policy of the crowdfunding prospectus, there are very detailed requirements for what should ƉůĂƞŽƌŵ͕ ĞŝƚŚĞƌƌĞĐĞŝǀ ĞƐŚĂƌĞƐŝŶƚŚĞĐŽŵƉĂŶLJŽƌĐŽŶƚƌŝďƵƚĞƚŽĂ ďĞĐŽŶƚĂŝŶĞĚŝŶƚŚĞŝŶǀ ŝƚĂƟŽŶĚŽĐƵŵĞŶƚ͘ ĞĐĂƵƐĞŵŝŶŝ-bond fund that invests as a nominated agent. offers do not call for a prospectus, but are instead financial ƉƌŽŵŽƟŽŶƐ͕ ƚŚĞƌĞŝƐŶŽƉƌŽƐƉĞĐƚƵƐƚLJƉĞůŝƐƚŽĨŵĂŶĚĂƚŽƌLJĐŽŶƚĞŶƚ ‡›ˆ‡ƒ–—”‡•ƒ†„‡‡ϐ‹–•‘ˆ‡“—‹–› ”‘™ †ˆ—†‹‰ ƌĞƋƵŝƌĞŵĞŶƚƐ͘ , Žǁ Ğǀ Ğƌ͕ ƚŚĞƌĞŝƐĂŐĞŶĞƌĂůŽďůŝŐĂƟŽŶƚŚĂƚĂůů ĞůĞŵĞŶƚƐŽĨƚŚĞƉƌŽŵŽƟŽŶĂƌĞΗĨĂŝƌ͕ ĐůĞĂƌĂŶĚŶŽƚŵŝƐůĞĂĚŝŶŐΗ͘  ƌŽǁ ĚĨƵŶĚŝŶŐŽī ĞƌƐƐŽŵĞĂƩ ƌĂĐƟǀ ĞďĞŶĞĮ ƚƐƚŽĂĨƌĂŶĐŚŝƐĞ There is some guidance as to what this phrase means but it is business, including: ůĂƌŐĞůLJĂŵĂƩ ĞƌĨŽƌƚŚĞ&ĂƵƚŚŽƌŝƐĞĚƉĞƌƐŽŶƚŽĚĞƚĞƌŵŝŶĞĂƐ part of their approval process. There is no requirement to show  investors can share in the growth in the value of the Į ŶĂŶĐŝĂůŝŶĨŽƌŵĂƟŽŶĨŽƌĂƐƉĞĐŝĮ ĐƉĞƌŝŽĚ͕ ďƵƚƚŚĞ&ĂƵƚŚŽƌŝƐĞĚ ƵŶĚĞƌůLJŝŶŐĨƌĂŶĐŚŝƐĞ͕ ǁ ŝƚŚƚŚĞƉŽƚĞŶƟĂůĨŽƌĂĚĚŝƟŽŶĂů person will want to ensure that there is sufficient financial dividend income; ŝŶĨŽƌŵĂƟŽŶƚŽŐŝǀ ĞŝŶǀ ĞƐƚŽƌƐĂĨƵůůƵŶĚĞƌƐƚĂŶĚŝŶŐŽĨƚŚĞďƵƐŝŶĞƐƐ  crowdfunding is typically offered by start-up, early stage and they are being invited to invest in. growth businesses so this model is a good fit for both businesses looking to kick start their expansion (either t ŝƚŚĞī ĞĐƚĨƌŽŵϮϬϭϰ͕ ƚŚĞ&ŝŶƚƌŽĚƵĐĞĚĂĚĚŝƟŽŶĂů organically or through a franchise model, or typically a hybrid requirements on the FCA authorised persons approving mini-bond of both) and those looking to raise funds to buy their first Žī ĞƌƐ͘ ĞĨŽƌĞŵĂŬŝŶŐĂĚŝƌĞĐƚŽī ĞƌĮ ŶĂŶĐŝĂůƉƌŽŵŽƟŽŶ͕  franchise; authorised firms now need to check that a retail investor is  although restricted to raising no more than €5 million this will ĂƉƉƌŽƉƌŝĂƚĞůLJĐĞƌƟĮ ĞĚ͘ /ŶƉƌĂĐƟĐĞ͕ ƚŚŝƐŵĞĂŶƐƚŚĂƚĞĂĐŚƉĞƌƐŽŶ ŶŽƚ͕ ǁ ŝƚŚŝŶĂĨƌĂŶĐŚŝƐĞĐŽŶƚĞdžƚ͕ ĐƌĞĂƚĞĂŶLJĚŝĸ ĐƵůƟĞƐĂƐƚŚĞ wishing to invest in mini-bonds must confirm that they will restrict investments sought by both franchisors and franchisees is ƚŚĞŵƐĞůǀ ĞƐƚŽŝŶǀ ĞƐƟŶŐŽŶůLJϭϬй ŽĨƚŚĞŝƌŶĞƚŝŶǀ ĞƐƟďůĞĮ ŶĂŶĐŝĂů likely to fall significantly below that cap; and assets in ‘non-ƌĞĂĚŝůLJƌĞĂůŝƐĂďůĞƐĞĐƵƌŝƟĞƐ͛ ƐƵĐŚĂƐŵŝŶŝ-bonds. In ĂĚĚŝƟŽŶ͕ &ĂƵƚŚŽƌŝƐĞĚĮ ƌŵƐŵƵƐƚĐŽŶĚƵĐƚĂŶĂƉƉƌŽƉƌŝĂƚĞŶĞƐƐ  importantly, there is no requirement on the company to make test before allowing any of these investors to invest. interest repayments. dŚĞƐĞĂĚĚŝƟŽŶĂůƌĞƋƵŝƌĞŵĞŶƚƐĐĂŶďĞƐĂƟƐĮ ĞĚďLJ&ĂƵƚŚŽƌŝƐĞĚ How does equity crowdfunding work? Į ƌŵƐŽŶĂŶŝŶĚŝǀ ŝĚƵĂůďĂƐŝƐ͕ ďƵƚƐŽŵĞĐƌŽǁ ĚĨƵŶĚŝŶŐŽƌŐĂŶŝƐĂƟŽŶƐ͕  such as Crowdcube, have built these features into their The legal framework around equity crowdfunding is very similar ŝŶĨƌĂƐƚƌƵĐƚƵƌĞĂŶĚŶŽǁ Žī ĞƌĂŶĞdžĐĞůůĞŶƚĨŽƌƵŵĨŽƌĐŽŶĚƵĐƟŶŐ to that of mini-bonds, except that the companies are offering mini-bond offers. shares in themselves, rather than units of debt.

Crowdfunding The applicable legal regimes are the same; there is a prospectus ĂŶĚĮ ŶĂŶĐŝĂůƉƌŽŵŽƟŽŶƐƌĞŐŝŵĞ͘ t ŝƚŚƌĞŐĂƌĚƐƚŽƚŚĞƉƌŽƐƉĞĐƚƵƐ As the same suggests, crowdfunding is a way of raising capital regime, shares are always transferrable and therefore every ĨƌŽŵĂůĂƌŐĞŶƵŵďĞƌŽĨŝŶǀ ĞƐƚŽƌƐŝŶƌĞůĂƟǀ ĞůLJƐŵĂůůĂŵŽƵŶƚƐƚŽ equity crowdfunding offer must be restricted in size to less than ĨƵŶĚĂďƵƐŝŶĞƐƐ͕ ƉƌŽũĞĐƚŽƌǀ ĞŶƚƵƌĞ͘ dŚŝƐŝƐŽŌĞŶĚŽŶĞƚŚƌŽƵŐŚ ΦϱŵŝůůŝŽŶ͘ dŚĞƌĞĂŌĞƌ͕ ƚŚĞĮ ŶĂŶĐŝĂůƉƌŽŵŽƟŽŶƐƌĞŐŝŵĞǁ ŝůůĂƉƉůLJ ŽŶůŝŶĞƉůĂƞŽƌŵƐĂŶĚĐĂŶƌĞĂĐŚƚŚŽƵƐĂŶĚƐŽĨƉŽƚĞŶƟĂůĨƵŶĚĞƌƐ͘ exactly as described above – ƐŽĂŶŝŶǀ ŝƚĂƟŽŶĚŽĐƵŵĞŶƚŵƵƐƚďĞ prepared and approved by an FCA authorised person, who will There are three principal types of crowdfunding: need to ensure that the document is fair, clear and not ŵŝƐůĞĂĚŝŶŐĂŶĚƚŚĂƚƚŚĞŽī ĞƌŝƐŽŶůLJŵĂĚĞƚŽƉĞƌƐŽŶƐǁ ŚŽƐĂƟƐĨLJ the FCA's new criteria.  Debt;  Equity; and The differences between debt and equity crowdfunding  ŽŶĂƟŽŶ͘ ĞďƚĂŶĚĞƋƵŝƚLJĐƌŽǁ ĚĨƵŶĚŝŶŐƐŚĂƌĞŵĂŶLJĨĞĂƚƵƌĞƐ͕ ŝŶƉĂƌƟĐƵůĂƌ Debt investors lend for financial returns by way of interest, ƚŚĞƌĞůĂƟǀ ĞĞĂƐĞĂŶĚĐŽƐƚ-Ğī ĞĐƟǀ ĞŶĞƐƐǁ ŝƚŚǁ ŚŝĐŚƚŚĞLJĂůůŽǁ  bypassing intermediaries such as banks. The investment can be by growing businesses to access finance. way of mini-bonds, as described above. , Žǁ Ğǀ Ğƌ͕ ďLJĚĞĮ ŶŝƟŽŶ͕ ĚĞďƚĨƵŶĚƌĂŝƐŝŶŐĐĂůůƐĨŽƌĐŽŵƉĂŶŝĞƐƚŽ deliver regular interest payments to investors. In order to be able to offer this, companies need to be confident that they will generate sufficient revenue to meet the interest payments, as well as repay the capital at the end of the term, and this will be a key element that the FCA authorised person will want to review ĂƐƉĂƌƚŽĨƚŚĞŝƌĂƉƉƌŽǀ ĂůƉƌŽĐĞƐƐ͘ dŚŝƐŝƐŽĨƉĂƌƟĐƵůĂƌƌĞůĞǀ ĂŶĐĞƚŽ ĂƉŽƚĞŶƟĂůĨƌĂŶĐŚŝƐĞĞĐŽŶƐŝĚĞƌŝŶŐƵƐŝŶŐĚĞďƚĐƌŽǁ ĚĨƵŶĚŝŶŐĂƐĂ means to raise finance to acquire and fund a franchise. The ĨƌĂŶĐŚŝƐĞĞŵƵƐƚƐĂƟƐĨLJŝƚƐĞůĨĂŶĚƚŚĞ&ĂƵƚŚŽƌŝƐĞĚƉĞƌƐŽŶƚŚĂƚ ŝƚĐĂŶĂī ŽƌĚƚŽŵĂŬĞƚŚĞŝŶƚĞƌĞƐƚƉĂLJŵĞŶƚƐŝŶĂĚĚŝƟŽŶƚŽƚŚĞ

2 Briefing Paper

payment of franchise fees to the franchisor. As a result, debt ůŽĐĂƟŽŶƐƚŚĂƚƚŚĞLJŽƚŚĞƌǁ ŝƐĞǁ ŽƵůĚŶŽƚĐŽŶƐŝĚĞƌƚŽďĞǀ ŝĂďůĞ͘  crowdfunding is more suited to established businesses with a ƌŽǁ ĚĨƵŶĚŝŶŐĚŽĞƐŶŽƚŝŵƉŽƐĞƚŚĞƐĂŵĞĐŽŶƚƌŽůƐĂƐƚƌĂĚŝƟŽŶĂů ƚƌĂĐŬƌĞĐŽƌĚŽĨƌĞǀ ĞŶƵĞŐĞŶĞƌĂƟŽŶƚŚĂƚƚŚĞLJĐĂŶďĂƐĞƌĞůŝĂďůĞ ďĂŶŬůĞŶĚŝŶŐ͘ &ƌĂŶĐŚŝƐĞĞƐƚŚĂƚƐŽƵƌĐĞĚĮ ŶĂŶĐĞĨƌŽŵƚƌĂĚŝƟŽŶĂů forecasts on. If they can meet these requirements, companies ƌŽƵƚĞƐǁ ĞƌĞƌĞƋƵŝƌĞĚƚŽƐĂƟƐĨLJƉŽƚĞŶƟĂůůLJƐƚƌŝĐƚďĂŶŬůĞŶĚŝŶŐ ĐĂŶĞŶũŽLJƚŚĞĂďŝůŝƚLJƚŽƐĞĞŬĂŶLJůĞǀ ĞůŽĨĨƵŶĚŝŶŐǁ ŝƚŚŽƵƚĚŝůƵƟŶŐ requirements. In contrast, crowdfunding does not impose the ownership of the business. same controls and therefore runs the risk of allowing less ƉƌĞƉĂƌĞĚĨƌĂŶĐŚŝƐĞĞƐƚŽĞŶƚĞƌƚŚĞŶĞƚǁ ŽƌŬ͘ &ƌĂŶĐŚŝƐĞĞƐĂƌĞŽŌĞŶ &ŽƌƉŽƚĞŶƟĂůĨƌĂŶĐŚŝƐĞĞƐŽƌĐŽŵƉĂŶŝĞƐůŽŽŬŝŶŐƚŽĨƵŶĚƚŚĞŝƌĞĂƌůLJ Ěƌŝǀ ĞŶƚŽƐƵĐĐĞĞĚƚŚƌŽƵŐŚĂƌĞĂůŝƐĂƟŽŶƚŚĂƚƚŚĞŝƌŽǁ ŶŝŶǀ ĞƐƚŵĞŶƚ franchise growth, equity crowdfunding may be more appropriate. ŝƐĂƚƐƚĂŬĞ͘ /ĨĨƌĂŶĐŚŝƐĞĞƐĂƌĞŶŽƚŝŶǀ ĞƐƟŶŐƚŚĞŝƌŽǁ ŶŵŽŶĞLJƚŚĞŶ t ŝƚŚƚŚĞƐĞƉƌŽƉŽƐŝƟŽŶƐ͕ ƚŚĞƌĞĂƌĞŶŽŐƵĂƌĂŶƚĞĞĚŝŶƚĞƌĞƐƚŽƌ ƚŚĞƌĞŝƐĂůǁ ĂLJƐĂƌŝƐŬƚŚĂƚƚŚĞŝƌŵŽƟǀ ĂƟŽŶ– and fear of failure – dividend payments and investors understand that capital will not be as acute as a franchisee who has invested everything ĂƉƉƌĞĐŝĂƟŽŶŝƐŶŽƚŐƵĂƌĂŶƚĞĞĚ͘ ^ŵĂůůĞƌƐƵŵƐĐĂŶďĞƌĂŝƐĞĚĂŶĚ into the venture. investors take a share of the ownership of the business – but this can provide vital capital at an early stage of a business's growth or &ŝŶĂůůLJ͕ ĐƌŽǁ ĚĨƵŶĚŝŶŐŚĂƐƚŚĞƉŽƚĞŶƟĂůƚŽŝŶĐƌĞĂƐĞƚŚĞĞdžŝƐƟŶŐ ǁ ŚĞŶĂƉŽƚĞŶƟĂůĨƌĂŶĐŚŝƐĞĞŝƐůŽŽŬŝŶŐƚŽƌĂŝƐĞĨƵŶĚƐŶĞĞĚĞĚƚŽ natural tension between franchisor and franchisee. Franchisors buy into a franchise. typically calculate their service fees based on a percentage of the franchisee's gross revenues whereas in contrast the franchisee's The crowdfunding difference focus is on net income. Crowdfunding investors share a similar ƉĞƌƐƉĞĐƟǀ ĞƚŽƚŚĞĨƌĂŶĐŚŝƐĞĞ͕ ǁ ŝƚŚĂĨŽĐƵƐŽŶŶĞƚŝŶĐŽŵĞ͕ ĂŶĚŝƚŝƐ There are a number of factors which make crowdfunding and not hard to imagine the pressure that a large group of investors franchising a natural fit. For a start, crowdfunding is aimed at might exert on a franchisee to increase net income through, for companies with lower investment needs (less than €5 million) – ĞdžĂŵƉůĞ͕ ĂŐŐƌĞƐƐŝǀ ĞƉƌŝĐĞƌĞĚƵĐƟŽŶƐĂŶĚƉƌŽŵŽƟŽŶƐ͘  ŝĚĞĂůĨŽƌĂƉŽƚĞŶƟĂůĨƌĂŶĐŚŝƐĞĞŽƌĂďƵƐŝŶĞƐƐůŽŽŬŝŶŐƚŽƌĂŝƐĞ ƐƵĸ ĐŝĞŶƚĐĂƉŝƚĂůƚŽĨƵŶĚƚŚĞĐƌĞĂƟŽŶŽĨĂĨƌĂŶĐŚŝƐĞŶĞƚǁ ŽƌŬ͘  Whichever route is chosen, it's becoming increasingly clear that /ƚŝƐĂůƐŽĂŐƌĞĂƚǁ ĂLJƚŽĐŽŶŶĞĐƚǁ ŝƚŚĞdžŝƐƟŶŐĂŶĚƉŽƚĞŶƟĂů crowdfunding has a role to play in financing growing businesses. ĐƵƐƚŽŵĞƌƐ͕ ƉĂƌƟĐƵůĂƌůLJĨŽƌĂůŽĐĂůĨƌĂŶĐŚŝƐĞĞ͘ /ĨĂŶĞǁ ĨƌĂŶĐŚŝƐĞĞ ŽŵŵĞŶƚĂƚŽƌƐƚĂůŬŝŶƚĞƌŵƐŽĨΗĚĞŵŽĐƌĂƟƐŝŶŐĮ ŶĂŶĐĞΗ- allowing is lucky enough to have a few hundred local investors funding its ŶĞǁ ďƵƐŝŶĞƐƐĞƐƚŽďLJƉĂƐƐƚƌĂĚŝƟŽŶĂůďĂŶŬƐ͕ ǁ ŚŽŵĂLJŶŽƚďĞ business, those investors provide a natural client base. It also lending to small business in the current environment, and instead serves to weaken the argument that franchise brands are really reach out directly to the public. It's a fast-moving and growing ũƵƐƚďŝŐĐŽƌƉŽƌĂƚĞƉůĂLJĞƌƐŵŽǀ ŝŶŐŝŶƚŽůŽĐĂůĐŽŵŵƵŶŝƟĞƐ͘ dŚĂƚ area that every franchise business should be considering when has never been the case when the franchisee is usually a local seeking funding for a new business idea. small business itself. However, having a group of local investors in the franchise can promote the sense that this business (and the Fieldfisher has worked on many corporate mini-bond issues, brand) is local. having been instructed on approximately a dozen corporate mini- ďŽŶĚŝƐƐƵĞƐƚŽĚĂƚĞ͘ &ŽƌĨƵƌƚŚĞƌŝŶĨŽƌŵĂƟŽŶƉůĞĂƐĞĐŽŶƚĂĐƚƚŚĞ It's not only the local franchisee that can benefit from the loyalty authors: of its investors; the brand-owning franchisor can experience a similar effect. The recent 8 per cent four-year mini-bond issued ďLJD ĞdžŝĐĂŶƌĞƐƚĂƵƌĂŶƚĐŚĂŝŶŚŝůĂŶŐŽŝƐĂŐŽŽĚŝůůƵƐƚƌĂƟŽŶŽĨƚŚĞ two-ǁ ĂLJƌĞůĂƟŽŶƐŚŝƉďĞƚǁ ĞĞŶĨƵŶĚĞƌƐĂŶĚƚŚĞďƌĂŶĚ͘ /Ŷǀ ĞƐƚŽƌƐŝŶ their "burrito bond" are typically already fans of the brand or, if David Bond not, are likely to become so once they invest. Chilango tapped Partner - London into this cross-over by offering giving all investors two free burrito ǀ ŽƵĐŚĞƌƐĂŶĚƚŚŽƐĞŝŶǀ ĞƐƟŶŐŵŽƌĞƚŚĂŶάϭϬ͕ ϬϬϬƌĞĐĞŝǀ ĞĚĨƌĞĞ E: †ƒ˜‹†Ǥ„‘†̷ ϐ‹‡Ž†ϐ‹•Š‡”Ǥ ‘ ĨŽŽĚĨŽƌƚŚĞĞŶƟƌĞĚƵƌĂƟŽŶŽĨƚŚĞďŽŶĚ͘ George Cotter Crowdfunding is not without its own risks. For example, if Partner - London ƉŽƚĞŶƟĂůĨƌĂŶĐŚŝƐĞĞƐĂƌĞŶŽǁ ĂďůĞƚŽĂĐĐĞƐƐĨƵŶĚƐǁ ŚĞƌĞ ƉƌĞǀ ŝŽƵƐůLJƚŚĞLJĐŽƵůĚŶŽƚŚĂǀ ĞƐĂƟƐĮ ĞĚƚŚĞďĂŶŬΖƐůĞŶĚŝŶŐĐƌŝƚĞƌŝĂ E: ‰‡‘”‰‡Ǥ ‘––‡”̷ ϐ‹‡Ž†ϐ‹•Š‡”Ǥ ‘ T: +44 (0)20 7861 4531 there is a risk that franchisors might accept franchisees and

dŚŝƐƉƵďůŝĐĂƟŽŶŝƐŶŽƚĂƐƵďƐƟƚƵƚĞĨŽƌĚĞƚĂŝůĞĚĂĚǀ ŝĐĞŽŶƐƉĞĐŝĮ ĐƚƌĂŶƐĂĐƟŽŶƐĂŶĚƐŚŽƵůĚŶŽƚďĞƚĂŬĞŶĂƐƉƌŽǀ ŝĚŝŶŐůĞŐĂůadvice on any of the topics discussed.

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Field Fisher Waterhouse LLP is a limited liability partnership registered in England and Wales with registered number OC318472, ǁ ŚŝĐŚŝƐƌĞŐƵůĂƚĞĚďLJƚŚĞ^ŽůŝĐŝƚŽƌƐZĞŐƵůĂƟŽŶ ƵƚŚŽƌŝƚLJ͘ ůŝƐƚŽĨŵĞŵďĞƌƐĂŶĚƚŚĞŝƌƉƌŽĨĞƐƐŝŽŶĂůƋƵĂůŝĮ ĐĂƟŽŶƐŝƐĂǀ ĂŝůĂďůĞĨŽƌŝŶƐƉĞĐƟŽŶĂƚŝƚƐƌĞŐŝƐƚĞƌĞĚŽĸ ĐĞ͕ Zŝǀ Ğrbank House, 2 Swan Lane, London, EC4R 3TT. We use the word “partner” to refer to a member of Field Fisher Waterhouse LLP, or an employee or consultant with equivalent standing anĚƋƵĂůŝĮ ĐĂƟŽŶƐ͘

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