Mini-bonds: marketing, relationship-building and fundraising in a mini package

Since the launch of the ‘Shaving Bond’ by the men’s grooming brand, King of Shaves, in 2009 there has been a fair amount of publicity surrounding ‘mini-bond’ issues by various companies.

Mini-bonds started life as an alternative financing method at a time when the country was in the depths of a recession and bank lending was scarce.  They have since been used not only for fundraising, but also as a tool for companies to engage with their customer base by allowing customers to participate in the company’s future and (hopefully) its success story.  Many of the more recent mini-bond issues have also been structured to reward loyalty so the issuer gives the investor a cash coupon which is greater if cashed for goods or services provided by the issuer.

Most companies that have successfully used mini-bonds as a source of finance have been consumer facing companies with a database of several tens (if not hundreds) of thousands of customers and potential customers i.e. a ready-made audience who become the primary target for their test-marketing (to assess the appetite for a mini-bond issue) and the ultimate issue of the mini-bonds.  They have been very popular with companies with a retail offering such as fast-moving consumer goods, holiday companies, sports clubs etc.

Mini-bonds are not (and should never be presented to be) a safe investment for an investor.  They are usually structured as unsecured loans which are non-convertible, non-transferable and are not listed.  Therefore, investors have little recourse against the issuer if the coupon is not paid when due.  To encourage investors to invest in mini-bonds (and accept the risk associated with them), issuers provide much higher coupon rates as compared to those offered at UK high street banks.  In addition, the denomination of the mini-bonds is kept relatively low to allow the investors to invest amounts that are not significant for them.

From the issuing company’s perspective, a mini-bond issue has several advantages for the right company: (a) there is a huge amount of flexibility (and room for creativity) for the issuing company to decide the repayment terms and the manner in which it intends to pay its coupon (i.e. in cash or products or services or a combination of both etc.); (b) the issue increases the general marketing profile and brand awareness of the issuing company; (c) mini-bonds are significantly cheaper than other types of public funding, such as an equity or debt fundraise on the stock markets; (d) as the mini-bonds are a form of debt for the issuing company, the company’s shareholding is not diluted and there is no impact on the day to day running and management of the company; (e) even though the consent of any existing lender will no doubt be required before an issue of mini-bonds, because the mini-bonds tend to be unsecured, this tends to be straightforward; and (f) the timeframe required for a mini-bond issue to “go live” is short (typically 4-5 weeks), as the documentation involved is a lot lighter than other types of public issue and takes the form of an invitation document or an information memorandum.

While, as mentioned, mini-bond issues are flexible and relatively straight-forward, structuring advice will nevertheless be required and regulations, designed to protect consumers, complied with.  The rules are relatively light touch, as compared with other forms of public fundraising, but experienced legal advice should be taken.

The UK economy is improving and there are many ways available for companies to raise finance, but mini-bonds should not be looked at only as tool to raise finance, even though that is the underlying purpose for them.  The value that mini-bonds create in terms of marketing, advertising and in aligning the interests of existing customers and fans with the company’s, is, in my view, worth considering.