Early Adopters Hub

Raising investment

General notes

Calls

Operations

EAH 4.0 - June new stage

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Exploring syndicate fund

Syndicate summary

Landscape - brief overview

Introducing investors to startups is an unregulated activity

Arranging a deal, or providing advice, are both regulated

There are different categories of investor: retail, high net worth, sophisticated, professional, each with their own level of protection and restrictions.

The crossover between these is a grey area, however, general consensus of those I’ve spoken to agrees: if you are involved in the paperwork, or making money from it, you’re arranging a deal

The framework has become much more harsh/strict in the last year

It can be done by becoming an Appointed Representative - costs around £5K per month, 3 months to get started

Conclusion/options

The regulatory framework within the UK realistically gives you two options. I say ‘realistically’ because there is a third option, but in my opinion, the questionable legality of it means it isn’t worthwhile, and I don’t recommend it.

Option one - Using a regulatory umbrella

Pros:

Sturgeon provides a regulatory umbrella, meaning you can promote the deal more freely

Gives us the ability to get started fast

Can invite accountant investors to invest

Monetisation - charge what you like

Scalable

Cons:

Costs - £5-10,000 up front, £3-5K per month

Have to go through training

Probably some level of oversight which could create difficulty when actually arranging the deals

Option two - Only invite VCs (and other professional investors) to invest

Pros (targeting VCs specifically for the upcoming deals):

Low (but not zero) regulatory risk - since they do the due diligence and are FCA regulated, there’s low likelihood of being considered to have ‘arranged the deal’ (which is illegal, unless registered)

No up front costs - can start today with prospecting investors

Long term relationships compound - as your deal flow increases and you get to know investors better, this can become increasingly lucrative

Potential opportunity to get in on the carry

Well established route, good VCs are generally receptive to scouts (especially ones like you who have high track record)

Build confidence in ability to secure deals, thus confidence in paying for regulatory approval

Pros (specifically becoming a deal scout):

There are specific VCs which actually offer this as part of their setup. For instance, Ada Ventures has theirs

here⁠

. They pay £5K finders fee, and 10% of the carry from the investments.

Regulatory plausible deniability - I’m told that this isn’t actually okay from a regulatory standpoint, however the fact that they are offering it (and the fact that they are FCA regulated), gives you a strong protection against any repercussions. Plus, they’re clearly being pretty obvious about it, so if they haven’t had an issue yet, it’s unlikely that the issue would occur with you.

Established route - there are networks like

this one⁠

, where you can list your deals and get a share of the carry.

Simplification and clear business ‘unit’ - it’s easy to see how this could be a clear value add to your business: you could list the VCs you work with as part of the offer of introductions you make.

Build track record for raising on fund

Cons:

Can’t present deals to accountants legally (*grey area, to be discussed)

Probably lower monetisation per day

Less influence over the outcome of the deals, might mean zero ROI for effort employed (e.g. if a deal falls through with a VC and you only get paid on deals they complete)

Option three - do it anyway (not recommended)

I’ve been told that many deal organisers do deals without having regulatory approval. I can’t recommend this, due to the illegality of it, but wanted to include it for completeness.

Pros

Gives you the initial capital required to then get correctly authorised

Allows you to immediately start testing out the hypothesis

Cons

Whilst there is a grey area around this, I think it’s hard to justify this not being considered arranging deals, therefore it is illegal

Severe consequences if caught - criminal charges, in the worst cases this can mean jail time and fines

Ethical concerns - the regulations are there to protect investors from making decisions they’re not qualified/experienced to make, circumventing this is unethical

Final conclusion

So, basically it comes down to the decision:

Do you want to only work with VCs and/or directly head towards the direction of deal scouting?

Or do you want a wider net, including the accountants, and access to a larger network of investors, but pay quite significantly to do get started (and have a monthly risk overhead)?

⁠

Workings

Legal options and risk levels summary table

Legal options and risk levels summary table

⁠

Legality exploration

There are two distinct activities - introducing investors to startups (not a regulated activity, meaning we could do it without complication), and arranging deals (regulated, requires FCA authorisation, or a regulatory umbrella). It’s not a crystal clear divide between the two, and seems to be depend on how risk adverse you are, and also whom your prospective investors are - retail investors get the most protection, and professional investors (like VCs) getting the least amount of protection. Given that VCs are almost always authorised to arrange deals themselves, it’s very unlikely that you would cross the line with them.

The consequences of arranging a deal without authorisation are quite severe - it’s considered a criminal offense, so could lead to jail time, a fine and nullifying the deal, although it’s worth bearing in mind that these consequences have to cover every instance e.g. somehow who helps pull together a startup round and accidently steps over the line from introducer to arranging a deal is not the same as someone who knowingly pulls together an investment scheme targeting hundreds of pensioners.

As you can see in the section below, anything around giving advice or helping with the deal structure (including the facilitation of signing of investment agreements) is seen as arranging, so personally that would make me uncomfortable.

However, VCs run their own due diligence, are FCA regulated themselves, and are therefore considered less protected - it’s a lot easier to see us as introducers in that context: we can provide them guidance on how the accelerator prepares businesses, without actually giving specific advice to them about the businesses themselves.

So, in essence, it depends on a few things:

Who are the prospective investors? If they are anything other than VCs, then we need a regulatory umbrella, such as Envestors (or in the long run, Sturgeon ventures).

If they are professional investors, then providing introductions to them is possibly acceptable.

Longer term solution: Sturgeon ventures, who offer a regulatory umbrella where you pay a monthly fee, they register a trade name, you operate under this trade name and use their regulatory protection.

Definitions ‘cheat sheet’

Introducing vs. Arranging Deals:

Introducing: Connecting investors with startups, without offering financial advice or participating in deal structuring. Generally not a regulated activity.

Arranging Deals: Involves more than just introductions, such as negotiating terms and facilitating agreements. This is a regulated activity requiring FCA authorization.

Special Purpose Vehicles (SPVs):

Definition: A separate legal entity created to pool investments from multiple investors for a single investment in a startup.

Pros: Simplifies the cap table, aligns investor interests, and limits liability.

Cons: Adds legal and administrative complexity, makes SEIS and other tax incentives more complicated, may require FCA authorization depending on the activities involved.

Types of Investors:

Retail Investors: Most protected, highest regulatory scrutiny.

Professional Investors (e.g., VCs): Least protected, potentially less regulatory burden for the accelerator.

Regulatory Umbrella:

A compliance solution where the accelerator operates under the FCA authorization of another entity, like Envestors or Sturgeon Ventures. Useful for engaging in regulated activities without needing direct FCA approval.

Consequences of Non-Compliance:

Arranging deals without authorization is a criminal offense, with risks of fines, jail time, and deal nullification.

Comprehensive summary of distinction between introducing and arranging

The terms "introducing" and "arranging a deal" have specific meanings within the context of UK financial regulation, particularly under the Financial Services and Markets Act 2000 (FSMA). However, the boundaries between these activities can sometimes be ambiguous and subject to interpretation. It's crucial to consult legal professionals for advice tailored to your specific situation. Here are some general guidelines:

Introducing:

Definition: Introducing generally involves connecting a potential investor with an investment opportunity. The role is typically limited to making that initial connection.

Activities Generally Included:

Providing the name and contact details of a potential investor to a startup, or vice versa.

Sending informational materials about a startup to potential investors without giving advice.

Legal Considerations:

Introducing alone is less likely to be considered a regulated activity under FSMA, especially if no advice is given and introductions are made to FCA-authorized persons.

The introducer must be careful not to cross into the territory of "arranging" by getting involved in deal negotiations, providing advice, or handling money.

Arranging a Deal:

Definition: Arranging a deal is a more involved process and generally includes activities that help bring about a transaction in investments. This is a regulated activity under FSMA.

Activities Generally Included:

Negotiating terms between an investor and a startup.

Facilitating the signing of investment agreements.

Assisting in the structure of the investment deal, such as deciding the type of shares to be issued.

Legal Considerations:

Because this is a regulated activity, FCA authorization is typically required unless an exemption applies. Due diligence and other regulatory responsibilities are usually involved.

Notes on costs

Envestors: £5K per months for AR route

Sturgeon ventures:

Per person

Setup fee: £1,500 +VAT

£1K + VAT onboarding the trademarked entity

£2,500 +VAT per month, for the two people

PI insurance - £1M of cover from BMS. £4-5K!

Required to join the CISI - £155+VAT per year

Fixed costs to FCA

FCA anti crime levy £50 approx

0.03% on what we earn

£1,000 creation of the emails

£200 trademark fee

They did discuss a percentage based model, but then said that they couldn’t do it.

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