Connect with us

Investing

Protecting European critical assets from foreign investment following the Covid-19 crisis

Published

on

Protecting European critical assets from foreign investment following the Covid-19 crisis

By Genevra Forwood & Axel Schulz[i]

  1. Introduction

The Covid-19 pandemic has focused the attention of the European Union (“EU”) and its Member States on the risk of foreign investment in critical European assets jeopardising security and public order. The pandemic has highlighted the importance of strategic industries – the production of medical supplies, personal protection equipment (PPE) and a potential vaccine come to mind but many other assets could be relevant to ensuring public security and order. At the same time, struggling European companies could become an attractive target for foreign investors. While the EU and its Member States, traditionally very open to foreign investment, may see foreign investors with increased skepticism, distressed companies may see foreign investors as a last hope for survival. Balancing the different interests will become one of many challenges for foreign investment control in Europe.

The possibility for EU countries to control foreign investments – either foreign direct investments (“FDI”), where the investor has a controlling stake in a company, or portfolio investments, where the foreign investor does not acquire control – for public policy and security reasons has always existed under the EU Treaties. Over the years, more countries have adopted rules to screen foreign investment and the new EU-level coordination mechanism under the FDI Screening Regulation[ii] will be effective from October 2020.

During the Covid-19 pandemic, the European Commission (“Commission”) gave new impetus to this trend, publishing guidelines on 25 March 2020 (“Guidelines”)[iii] urging Member States to more actively scrutinise foreign investments in European strategic assets. Several Member States have already tightened up their foreign investment screening mechanisms, at the same time as ramping up public support measures to European companies, facilitated by special State aid rules.[iv]

This article sets out the risks the Covid-19 outbreak entails for EU strategic assets (2.) and will explore the legal framework by which Member States and the EU can control foreign investments(3.): first, the national screening mechanisms and the EU FDI Screening Regulation (3.1.); second, restrictions on the free movement of capital (3.2.); and, third, the (partial) nationalisation of strategic EU companies (3.3.).It concludes with an outlook on future developments (4.).

  1. How the pandemic exposes EU strategic industries to potential risks
Genevra Forwood

Genevra Forwood

For many years, Member States have been concerned about non-EU investors taking over European companies with key technological competences for strategic reasons.[v] After failed attempts to adjust competition rules to enable the emergence of ‘European champions’ able to compete more effectively with foreign companies,[vi]the focus turned to a more interventionist approach, to directly protect strategic

pandemic, and the resulting economic pressure, has highlighted the importance of strategic goods and technologies. Member States experienced shortages of medicines (with some active ingredients manufactured outside the EU) and PPE, due to their dependence on third countries. In response, the Commission imposed a temporary export authorisation for such products manufactured in Europe and encouraged European businesses to diversify their supply chains for critical goods.[vii]

At the same time, tensions arose in relation to allegations that the United States was seeking exclusive access to potential vaccines developed in Germany.[viii] Both issues reflect the susceptibility of integrated global supply chains to crises and political arbitrage.[ix]The pandemic also made the EU strategic industries an attractive target for foreign investors due to plunging asset prices across all sectors.[x]The Commission notes in its Guidelines that “ among the possible consequences of the current economic shock is an increased potential risk to strategic industries, in particular but by no means limited to healthcare-related industries.”[xi]In fact, the MSCI Europe Index, which tracks the return of stocks within 15 European developed markets, has collapsed by 23% this year.[xii]Against this background, foreign companies and funds are gearing up for acquisitions in the EU.[xiii]

  1. Scaling up the tools to protect the EU’s strategic industries from foreign investment 

Due to the impact on national security and public order created by such economic exposure of strategic industries, both the EU and its Member States are implementing additional measures to protect strategic assets from foreign investments.This ranges from full-fledged FDI, whereby the foreign investor establishes or maintains a lasting and direct link between the foreign investor and the entrepreneur, enabling it effective participation in the management or control of a company,[xiv]to portfolio investments, involving the acquisition of shares with no control rights, or the buying of IP rights. 

  • Tightened (or new) national screening and a new EU-level review
Axel Schulz

Axel Schulz

Although FDI is an ‘exclusive competence’ of the EU,[xv] Member States retain sole responsibility for their national security and have the right to protect their essential security interests.[xvi] As a result, foreign investment screening currently takes place at the national level, with a patchwork of regimes, some Member States with no specific controls at all.[xvii]The recent Commission Guidelines urge Member States that already have a screening mechanism in place to make “full use” of it, and for those Member States that do not to adopt one quickly and in the meantime “use all other available options”.

The EU FDI Screening Regulation establishes an additional level of scrutiny, giving other Member States and the Commission the possibility to comment on foreign investments in all sectors, whether or not they are subject to national FDI screening. The host Member State must “give due consideration” to the views of the other Member States and the Commission and, where FDI is likely to affect projects or programmes of Union interest, must “take utmost account of the Commission’s opinion” and explain why if they don’t.  However, where there is a national screening mechanism, the host Member State has the final say as to whether the investment is allowed, and any conditions attached.[xviii]

It remains to be seen how the EU-level mechanism will work in practice. Complexities could arise where the European target has subsidiaries in numerous Member States. Although the ‘direct’ investment would typically only be made at the level of the European parent, this could trigger screening in the Member States where subsidiaries are located, since many national screening rules are also triggered by indirect control. If the national screening of ‘indirect’ investments is covered by the FDI Screening Regulation (and this can be questioned, given that it applies only to foreign ‘direct’ investment), there would be multiple ‘host’ Member States notifying the same investment, giving rise to multiple, and potentially contradictory, screening procedures.

The mechanism comes into operation on 11 October 2020, but the recent Guidelines note that even where a foreign investment is completed before that date without undergoing a national screening process, other Member States and the Commission may provide ex post comments and opinions from 11 October 2020 and until 15 months after the foreign investment has been completed.

It is unclear what impact any negative comments could have on completed investments. The regulation only requires the host Member State to “give due consideration” to the views of other Member States and the Commission (or, where there is a potential impact on projects or programmes of Union interest, to “take utmost account of” the Commission’s opinion). The Guidelines envisage the host Member State adopting “necessary mitigating measures”, giving the example of conditions guaranteeing the supply of medical products/devices. In view of the Union interest, such commitments might extend beyond the predicted needs of the host Member State.

The Guidelines also recall that Member States can intervene outside of screening mechanisms, for instance by imposing compulsory licences on patented medicines in the case of a national emergency. However, the FDI Screening Regulation is silent on the particular mitigating measures that might be imposed or how these could be enforced. Ultimately, these matters will be driven by national law and policy, but also increasingly influenced by the interests of other Member States and the EU.

Various countries have already tightened up their FDI screening mechanisms and provided further protections from potentially hostile foreign takeovers. In early March 2020, Spain lowered the screening threshold for foreign share acquisitions to 10% and expanded the FDI review to several sectors including critical infrastructure, healthcare, and technology.[xix] In April 2020, the German Government initiated a reform of the Foreign Trade and Payments Act. A potential deal can now be reviewed if there is a ‘probable harm’ to public order or security as opposed to ‘actual harm’. The effect of the transaction on other Member States and projects of EU interest will then be assessed and the affected transaction put on hold pending a final decision.[xx]

On 27 April 2020, the French Government announced a lowering of the screening threshold for foreign share acquisitions from 25% to 10%, while expanding the screening to the biotechnology sector.[xxi] Similarly, the Italian Government extended the State’s veto power to block or set limits to certain types of foreign investments in a certain company to the sectors of financial services, infrastructure and critical technology, energy, transport, water and health, food, data elaboration, AI, robotics, semiconductors, cybersecurity, nanotechnology, and biotechnology. In addition, the Italian Government introduced a notification requirement for EU investors acquiring control and for non-EU companies acquiring a stake of 10% or higher and above EUR 1 million in an Italian company.[xxii] Poland is planning similar steps.[xxiii]

  • Enhanced screening of non-FDI capital under free movement of capital rules

Foreign investment that does not constitute FDI[xxiv], such as portfolio investment, falls outside the scope of the FDI Screening Regulation. Nevertheless, the Guidelines also calls on Member States to scrutinise such investments. It recalls that the EU free movement of capital rules,[xxv]which generally prohibit restrictions on capital movements and payments between Member States and between Member States and third countries, allow derogations to be invoked by the EU – “[w]here, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union”,[xxvi] or by Member States – inter alia, “on grounds of public policy or public security”.[xxvii]

The Guidelines consider“ portfolio investments, which do not confer the investor effective influence over management and control of a company [and] are generally less likely than FDI to pose issues in terms of security or public order.” However, “where they represent an acquisition of at least a qualified shareholding that confers certain rights to the shareholder or connected shareholders under the national company law (e.g., 5%), they might be of relevance in terms of security or public order.”[xxviii] In other words, while small portfolio investments into EU companies seem less problematic to the Commission, it may be relevant to screen (and block) minority acquisitions when certain rights are attached.

The Guidelines also recall that EU law permits Member States to acquire ‘golden shares’ in companies, retaining special rights, such as the right to block or set limits to certain types of investments, although such an action must be necessary and proportionate to achieve a legitimate public policy objective.

Indeed, according to the case-law of the CJEU, “[g]rounds of public policy, public security and public health can be relied on if there is a genuine and sufficiently serious threat to a fundamental interest of society”.[xxix] The Guidelines point out that in situations “of ‘predatory buying’ of strategic assets by foreign investors (e.g. with a view to limit supply to the EU market of a certain good/service)”, these grounds could justify “restrictive measures necessary to ensure security of supply (for instance in the energy field) or the provision of essential public services if less restrictive measures (e.g. regulatory measures imposing public service obligations on all companies operating in certain sectors) are insufficient to address a genuine and sufficiently serious threat to a fundamental interest of society”.[xxx] Interestingly, the Commission stresses that “ restrictive measures may also be taken to address threats to financial stability.”[xxxi]

In relation to stock-quoted companies deemed to be under-valued, the Guidelines indicate that restrictions could be considered, taking into account the true value of these companies to society and the risk dependence if they fall into foreign hands. The Guidelines also suggest that, as concerns investments from a non-EU countries, “additional grounds of justification may be acceptable” and “the permissible grounds of justification may also be interpreted more broadly”.[xxxii]

It should be noted, however, that the CJEU has traditionally taken a restrictive view of the derogations to the free movement principles, whether the investment is intra-EU or from a non-EU country. If the public policy can be achieved through other means (e.g., regulatory measures imposing public service obligations), then a restriction on the foreign investment would be deemed disproportionate.

  • (Partial) nationalisation of strategic companies to prevent foreign takeovers

Member States may also protect European assets by directly acquiring a controlling stake in them and thereby averting foreign takeovers. In principle, the EU Treaties are neutral regarding the system of property ownership – either private or public.[xxxiii] EU law does not prohibit full or partial nationalisation. However, a Member State nationalising a private undertaking must act like a ‘private market economy operator’ regarding the purchase price and the management of the nationalised undertaking, to avoid being caught by State aid rules.[xxxiv]

In response to the Covid-19 crisis, the Commission adopted a special set of State aid rules,[xxxv] giving Member States further flexibility to support the economy. In May 2020, the Commission amended the Temporary Framework by empowering Member States to recapitalise companies in distress, under a number of conditions relating to the necessity, appropriateness and size of intervention, the State’s entry in the capital of companies and remuneration, the State’s exit from the capital of the companies concerned, various conditions regarding governance (including a ban on dividends and share buybacks), and a prohibition of cross-subsidisation and acquisition.[xxxvi]Thus, companies in distress may have to renounce a future take-over possibility where they have accepted public capital injections under the State aid rules.

  1. Conclusion

The Covid-19 pandemic has undoubtedly accelerated the trend towards more foreign investment controls, with Member States widening the scope of their screening mechanisms. A further tightening of the conditions and implementation of new national screening mechanisms by other Member States will likely follow. The Guidelines also encourage Member States to consider other measures to curb non-FDI third country investments, potentially testing the limits of the derogations to the capital movement rules, and to consider ‘golden shares’, recapitalisation and even nationalisation.

Announcing the recent Guidelines, European Commission President von der Leyen stated that: “The EU is and will remain an open market for foreign direct investment. But this openness is not unconditional.”  While foreign investment flows will be as important as ever in rebuilding the European economy after the Covid-19 crisis, it is clear that foreign investors looking towards the EU will need to navigate these emerging rules, at national and EU level.

[i] Both partners of White & Case, Brussels.  The views expressed are personal and do not necessarily represent those of the Firm or any of its clients.  The authors are grateful to Aron Senoner and Matthias Vangenechten for their tremendous assistance.

[ii] Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union [2019] OJ LI79/1 (“FDI Screening Regulation”).

[iii]‘Guidance for Member States concerning FDI and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (‘FDI Screening Regulation’)’ (25 March 2020), available at: https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158676.pdf. See White & Case, ‘COVID-19 – Commission issues guidelines to protect European critical assets from foreign investment’ (1 April 2020), available at: https://www.whitecase.com/sites/default/files/2020-04/covid-19-commission-issues-guidelines-protect-european-critical-assets-foreign.pdf.

[iv]For further information, see https://ec.europa.eu/competition/state_aid/what_is_new/covid_19.html (consulted 9 May 2020).

[v]Letter of February 2017 from the French, German and Italian governments to the European Commission setting out concerns about “a possible sell-out of European expertise” , available at https://www.bmwi.de/Redaktion/DE/Downloads/S-T/schreiben-de-fr-it-an-malmstroem.pdf?__blob=publicationFile&v=5.

[vi]Jorge Valero, ‘19 EU countries call for new antitrust rules to create “European champions”’ (19 December 2018), available at: https://www.euractiv.com/section/economy-jobs/news/19-eu-countries-call-for-new-antitrust-rules-to-create-european-champions/.

[vii] Commission Implementing Regulation (EU) 2020/402 of 14 March 2020 making the exportation of certain products subject to the production of an export authorization [2020] OJ LI77/1; Commission Recommendation (EU) 2020/403of 13 March 2020on conformity assessment and market surveillance procedures within the context of the COVID-19 threat [2020] OJ LI79/1. See also European Commission, ‘European Commission narrows down export authorisation requirements to protective masks only and extends geographical and humanitarian exemptions’ (14 April 2020), available at: https://trade.ec.europa.eu/doclib/press/index.cfm?id=2132.

[viii] UNCTAD, ‘Investment Policy Monitor’ (April 2020), available at: https://unctad.org/en/PublicationsLibrary/diaepcbinf2020d1_en.pdf; Guy Chazan, ‘Berlin acts to stop US poaching German coronavirus vaccine company’ (Financial Times, 15 March 2020), available at: https://www.ft.com/content/cf7ec42a-66bb-11ea-800d-da70cff6e4d3.

[ix]Adnan Seric et al, ‘Managing COVID-19: How the pandemic disrupts global value chains’ (World Economic Forum, 27 April 2020), available at: https://www.weforum.org/agenda/2020/04/covid-19-pandemic-disrupts-global-value-chains/; Rick Mullin, ‘COVID-19 is reshaping the pharmaceutical supply chain’ (Chemical & Engineering News, 27 April 2020), available at: https://cen.acs.org/business/outsourcing/COVID-19-reshaping-pharmaceutical-supply/98/i16; Jean Eaglesham, ‘Supply-Chain Finance Is New Risk in Crisis’ (WSJ, 4 April 2020), available at: https://www.wsj.com/articles/supply-chain-finance-is-new-risk-in-crisis-11585992601.

[x] Jim Brunsden,‘EU trade chief urges tougher defences against foreign takeovers’ (Financial Times, 16 April 2020), available at: https://www.ft.com/content/bf83fa94-1bcf-4532-a75a-50f41351c0d4; Javier Espinoza, ‘Vestager urges stakebuilding to block Chinese takeovers’ (Financial Times, 12 April 2020), available at: https://www.ft.com/content/e14f24c7-e47a-4c22-8cf3-f629da62b0a7.

[xi] Guidelines (emphasis added).

[xii] The MCI Europe Index reflects approximately 85% of the total market capitalisation, see ‘MSCI Europe Index’, available at:https://www.msci.com/end-of-day-history?chart=regional&priceLevel=41&scope=R&currency=119&indexId=110&size=36.

[xiii] Bloomberg News, ‘China’s Corporates Are Gearing Up in Europe for M&A Bargains’ (Bloomberg, 7 April 2020), available at: https://www.bloomberg.com/news/articles/2020-04-07/china-s-corporates-are-gearing-up-in-europe-for-m-a-bargains; David Hodari, ‘Saudi fund takes stakes in European oil companies’ (MarketWatch, 8 April 2020), available at: https://www.marketwatch.com/story/saudi-fund-takes-stakes-in-european-oil-companies-2020-04-08.

[xiv] Article 2, FDI Screening Regulation.

[xv]FDI falls within the field of the common commercial policy (Article 207 TFEU), in which, pursuant to Article 3(1)(e)of the Treaty of the Functioning of the European Union (“TFEU”), the European Union has exclusive competence.

[xvi] As provided for in Article 4(2) TEU, and in accordance with Article 346 TFEU.

[xvii] Currently, only 14 out of 27 EU Member States have a national screening mechanism in place, see European Commission, ‘List of screening mechanisms notified by Member States’, available at: http://trade.ec.europa.eu/doclib/html/157946.htm.

[xviii]Article 6(9) of the FDI Screening Regulation.

[xix] ‘Real Decreto-ley 8/2020, de 17 de marzo, de medidas urgentes extraordinarias para hacer frente al impacto económico y social del COVID-19’ (17 March 2020), available at: https://www.boe.es/buscar/pdf/2020/BOE-A-2020-3824-consolidado.pdf (in Spanish); White & Case, ‘Restrictions on foreign investments imposed by the Spanish government’ (23 March 2020), available at: https://www.whitecase.com/publications/alert/restrictions-foreign-investments-imposed-spanish-government.

[xx] BMWi, ‘Änderungen im Außenwirtschaftsrecht’ (27 April 2020), available at: https://www.bmwi.de/Redaktion/DE/Artikel/Service/Gesetzesvorhaben/erstes-gesetz-aenderung-aussenwirtschaftsgesetz.html (in German); BMWi, ‘Minister Altmaier: More comprehensive and proactive screening of investments in security-sensitive sectors’ (8 April 2020), available at: https://www.bmwi.de/Redaktion/EN/Pressemitteilungen/2020/20200408-minister-altmaier-more-comprehensive-and-proactive-screening-of-investments-in-security-sensitive-sectors.html; Christian Kraemer, ‘Germany tightens rules on foreign takeovers’ (Reuters, 8 April 2020), available at: https://www.reuters.com/article/us-health-coronavirus-germany-mergers/germany-tightens-rules-on-foreign-takeovers-idUSKBN21Q0VI.

[xxi] ‘Arrêté du 27 avril 2020 relatif aux investissements étrangers en France’ (30 April 2020), available at : https://www.legifrance.gouv.fr/affichTexte.do;jsessionid=D4BA721A93FCC280120B9D40B76BFD11.tplgfr25s_1?cidTexte=JORFTEXT000041835304&dateTexte=&oldAction=rechJO&categorieLien=id&idJO=JORFCONT000041835077 (in French); Guillaume de Calignon, ‘Coronavirus : la France va renforcer le contrôle des investissements étrangers’ (Les Echos, 29 April 2020), available at: https://www.lesechos.fr/economie-france/budget-fiscalite/coronavirus-la-france-va-renforcer-le-controle-des-investissements-etrangers-1199081 (in French).

[xxii] Governo Italiano, ‘Rafforzamento dei poteri speciali nei settori di rilevanza strategica e degli obblighi di trasparenza in materia finanziaria’ (6 April 2020), available at: http://www.governo.it/node/14417 (in Italian).

[xxiii] EURACTIV, ‘Poland launches new rules to prevent takeovers by non-EU investors’ (24 April 2020), available at: https://www.euractiv.com/section/economy-jobs/news/poland-launches-new-rules-to-prevent-takeovers-by-non-eu-investors/.

[xxiv] Article 2(1), FDI Screening Regulation defines FDI as an “investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity.”

[xxv] Articles 63 to 66, TFEU.

[xxvi] Article 66, TFEU.

[xxvii] Article 65(1)(b), TFEU.

[xxviii]Guidelines.

[xxix]See Case C-54/99 Église de Scientologie [2000] ECLI:EU:C:2000:124, para 17; Case C-503/99 Commission v Belgium [2002] ECLI:EU:C:2002:328, para 47; Case C-463/00 Commission v Spain [2003] ECLI:EU:C:2003:272, para 72.

[xxx] Guidelines.

[xxxi]ibid.

[xxxii]ibid, and referring to Case C-446/04 Test claimants in FII [2006] ECLI:EU:C:2006:774, para. 171.

[xxxiii] Article 345, TFEU.

[xxxiv] See Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Land Nordrhein-Westfalen [2003] ECLI:EU:T:2003:57, para 194; Case C-303/88 Italy v Commission [1991] ECLI:EU:C:1991:136, para 20; Case T-457/09 Westfälisch-Lippischer Sparkassen- und Giroverband [2014] ECLI:EU:T:2014:683, paras 387-389. For the State aid rules see Articles 107 and 108, TFEU.

[xxxv] European Commission, ‘Temporary Framework For State Aid Measures To Support The Economy In The Current Covid-19 Outbreak (consolidated version)’ (3 April 2020), available at: https://ec.europa.eu/competition/state_aid/what_is_new/TF_consolidated_version_as_amended_3_april_2020.pdf.

[xxxvi] European Commission, ‘Second Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak’ (8 May 2020), available at: https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_2nd_amendment_temporary_framework_en.pdf.

Investing

Revitalising the token market

Published

on

Revitalising the token market 1

By Gavin Smith, CEO at Panxora

With interest rates near zero and fears that whipsawing stock markets are set for further plunges, many investors are turning to alternative markets in the search for returns. Money flowing into cryptocurrency hedge funds and trusts like Grayscale is at all-time highs and the large cap coins seem to be entering a bull phase, but that capital is not trickling down into new token projects. Why are blockchain token projects struggling to attract funding?

Seed investor scepticism

Setting aside the reputational issues with mainstream investors, even those educated in blockchain tech are not signing on the dotted line. This is certainly due in part to the hangover from the early token market.

During the heady days of 2016/17, investors could buy tokens during the token sale, and if the project was legitimate – even if the business case wasn’t particularly strong – prices would soar based on market enthusiasm. Early investors purchased at a discount and cashed out almost immediately for a handsome profit – and then repeated the process again. The token sale allowed founders to amass a war chest large enough to finance the entire token project – without having to give up a large chunk of company equity. Everyone got what they needed out of the deal.

Running a token sale is far more expensive today than it was during the boom. Getting the attention of the token buying public in a market where advertorial has replaced editorial is expensive. This coupled with a regulatory framework that requires the advice of accountants, solicitors and information gathering of KYC details for investors all comes with an escalating price tag.

To accommodate the change in cost structure, tokens now need to acquire funding in two rounds. Frequently there is a first round where capital is raised from a few, large investors. This cash is then used to finance setup and marketing the main token sale. The token sale, in turn, provides the capital needed to run the entire business project.

Bridging the gap between token projects’ needs and early stage investors

To successfully get a token through the capital raising process, founders must acknowledge the risk assumed by those very early investors and reward them appropriately. And given that tokens may stagnate or fall in price post token sale means that a deep discount in token price is not necessarily attractive enough to get investors to commit.

Many tokens have turned to offering equity in the business in the effort to raise that first tranche of capital. If you look at the number of successfully concluded token sales, the downward trend has continued since Q2 2018, so offering equity is not sufficiently stimulating the market.

Two sides of the coin

So, what is the answer? It’s a complex question but one thing is certain. Any solution must be rooted in a deep understanding of what both parties need to successfully conclude the deal.

Gavin Smith

Gavin Smith

On the one hand, token founders’ needs are clear: they need enough capital to get the token ready for and through a successful liquidity event that will provide sufficient funds to build the project. The challenge lies in striking the right balance between accruing that capital and making sure not to offer so much project equity that give up either the control or the incentive founders need to drive the project forward.

On the other hand, while the needs of the seed capital investors are more complex, there are two areas of key concern: transparency and profit incentives.

Transparency can mean many things, but almost always includes providing more informative cost and profit projections, as well as answers to a whole range of questions, not least the following:

  • What happens to investor capital if the token sale event fails? Token founders must be transparent from the outset. The token market is highly speculative and early investors run the risk of losing their money should the project fail. Therefore, investors require a well-established fund governance process in place throughout the fundraising so they can make informed decisions on whether the project is worthwhile.
  • How are the assets for the entire project managed? Investors need to know that their money is in good hands and that proper treasury management techniques are being used to manage cryptocurrency volatility risk. Ideally, an independent custodian will be used to hold the funds and limit founders’ ability to draw down the capital – releasing funds to an agreed-upon schedule of milestones.
  • How are the rights of investors protected, for instance in the case of a trade sale? Investors need to know what happens if the company they are investing in is sold. What impact could this have on the value of their stake? Would a separate governance framework need to be established? These are critical questions and investors aren’t likely to settle for any ambiguity in the answers.

Profit incentives are important when it comes to encouraging early participation in a project. Investors need convincing that the proposition will keep risks to a minimum and focus on providing a strong probability of a return. This means that founders need to be able to defend the case for the increase in the value of their token.

But this isn’t the only incentive that matters. Investors can also be incentivised by preferential offerings such as early access to projects and services that might help their own business.

Let’s not forget that investors don’t support just any project. What really matters is that there is something special and unique about the business being underwritten by the token. Preferably something that could be shared upfront and directly benefit the investor – proof that the investment is really worth it.

And that’s what it all comes down to. Ultimately, while token projects are having a hard time finding funds at the moment, if they can prove their worth and provide full transparency and clear profit incentives to ease investors’ concerns, the money is out there. And deals can be done.

Continue Reading

Investing

Achieving steady returns in challenging times for later life planning

Published

on

Achieving steady returns in challenging times for later life planning 2

By Matt Dickens, Senior Business Development Director at Ingenious

The macro-economic conditions of the last five years have presented a relentless challenge for money managers seeking to produce consistent returns. It seems an all too distant memory that UK markets were caught in a happy period of low volatility and positive growth since the recovery from the financial crisis started in 2009. Enter 2016 and we have since found ourselves in an era of exceptional uncertainty. An acrimonious Brexit referendum and the following ambiguity, pressure on sterling, repeated challenges to the UK Government, a trade war between two of the world’s super-powers and now a global pandemic. All this as the world is going through a digital revolution.

Under these exceptional conditions, many investment strategies have understandably struggled to sustain the growth that investors had previously enjoyed without taking on elevated levels of risk and experiencing greater volatility and its associated negative impact. However, Ingenious Estate Planning has been operating alternative investment strategies for several years, which have produced a steady return with low volatility over this time as they possess little correlation to the main listed markets.

Real Estate

The affordable end of the UK’s residential real estate market has proven to be extremely robust during the recent uncertainty. The market benefits from some core fundamentals that have assisted it withstanding a lot of the pressures experienced by other sectors. Firstly, a large and sustained supply deficit. In 2018 the UK built 80,000 fewer houses than the actual requirement of 300,0001. This strong, inherent demand poses a clear investment opportunity to investors who can fund construction projects in the safe knowledge that there is an established demand on completion.

Secondly, this supply deficit has been recognised by Governments for several years and there has been a raft of policies enacted, all supportive of building more houses. For instance, the Help to Buy scheme has enabled many, often first-time buyers onto the property ladder. This scheme means there is a well-established and subsidised group of buyers ready to buy whenever developers complete construction. Thirdly, and more recently, the Government has acted quickly to identify the property sector as one that is key to the UK’s recovery from Covid-19. Through relaxing planning laws and offering stamp duty holidays, both the construction and sales market are being given valuable incentives that support an ongoing return for real estate investors.

Secured lending model

Despite these positive forces however, there remain some risks with investing in the property market, so a conservative investment strategy is key to protecting investors. Rather than take a 100% equity, or ownership, position in a house-builder, developer or single property, a portfolio-based, secured lending model, has a number of clear risk-mitigating benefits. For instance, by lending to a portfolio of developers, carefully selected on a project-by-project basis, and by earning a fixed rate of interest, rather than taking equity risk, there is inherently lower volatility in returns given the protection of a senior debt position on each development. Contracts set out clear loan terms meaning that regular interest is paid on the investment and upon final sale the repayment is made in full, all with the benefit of banking-style security protections. By contrast, equity investments and associated valuations can fluctuate over time as the asset price changes and so it is far more vulnerable to market conditions and sentiment, and ultimately any drop in value is suffered by the investor. In the lending model, any loss is initially felt by the borrower.

Benefits for estate planning

Ingenious Estate Planning Private Real Estate utilises this secured lending investment strategy. The Business Relief- qualifying service is commonly used by clients planning for later life. As savers and investors reach retirement and decumulation, they present wealth managers with a unique set of investment problems. Without careful planning, the start of this phase for many could signal the end of any capital growth and herald their savings being eroded to pay for life’s needs. Any investment offering both high volatility and potential drawdowns may therefore become unpalatable. And while many would wish to gift savings to their children to mitigate the risks to their beneficiaries of paying a hefty inheritance tax bill upon their death, the thought of losing both control and access to these savings when they may still need them, means many feel uncomfortable in taking that step.

However, this does not need to be a fate accepted by savvy investors and planners who can utilise a proven trading strategy that continues to both carefully and predictably grow their investment while also providing potentially full relief from inheritance tax.

Continue Reading

Investing

Getting ahead in 2020: Why building an emergency fund is the way forward

Published

on

Getting ahead in 2020: Why building an emergency fund is the way forward 3

By Shahid Munir, co-founder of MintedTM, an investment platform which allows individuals to buy and sell gold bullion.

2020 has forced a lot of changes, especially where personal finances are concerned; attitudes towards investment have shifted and financial security has taken priority. Knowing that high-risk investments won’t guarantee profit, individual investors are considering longer-term alternatives and opportunities to save. So, at a time when stock markets are volatile, where should individuals be investing their money for the best returns?

While no one could have predicted the coronavirus crisis or the widespread economic devastation that has come with it, tension has been growing across global marketplaces for some time. Back in 2018, there were talks of a financial crisis and, even before the pandemic, unsecured debt hit a new peak of £14,540 on average per household. Now, with the UK entering into the deepest recession on record, unemployment climbing, and government support dwindling, the true value of quick-access ‘emergency’ funds has come to the fore.

Whether it’s a failed MOT, a broken boiler, or redundancy, in the event of a financial emergency, individuals are less likely to have the time or inclination to research the options available; many may resort to quick-fixes such as a high-interest payday loans to get themselves out of a difficult situation. According to research from Which?, 30 percent of people earning up to £28,000 a year were unable to save during lockdown. However, as recovery gets under way, it’s clear putting money aside to cover any large, unforeseen expenses can help to preserve existing finances and keep stress to a minimum.

Shahid Munir

Shahid Munir

Despite there being plenty of investment options available, very few lend themselves to building an emergency fund. With government premium bonds currently yielding virtually nothing and interest rates on cash ISAs sitting far below inflation, what was once considered safe is not only under-performing but is costing investors money in the long run. To reduce risk, investors should be diversifying their portfolios and investing in cryptocurrency or physical assets such as gold. For example, gold Exchange Traded Funds (ETFs) are popular with some individuals because they provide an easy way of gaining exposure to any increases in the precious metal’s value, while still allowing easy access to the funds if they are needed

With new types of technology platforms offering easy-to-use mobile savings apps, individuals can look further than traditional ISAs and bonds and begin to start investing in precious metals, something that may not have seemed possible in the past. Being based on an average rate of return and outperforming inflation, gold isn’t just a safe haven risk-off asset, it’s a key step towards establishing a watertight emergency fund.

While many people are looking for innovative ways to maximise saving potential, it doesn’t have to be complicated. Often, taking a step back and considering both personal and financial objectives can work wonders. This may involve analysing personal expenditure, taking stock of any outgoings and gauging their appetite for risk. It is wise to work towards building an emergency fund that covers three to six months’ worth of bills and expenses or to save around 10 percent of an annual salary.

Treating an emergency fund like any other fixed cost on pay day and separating it from day-to-day bank accounts and transactions will make it easier to commit to investing. For example, taking advantage of any platform-specific features, such as setting up a minimum standing order, can take the pressure off investing a lump sum. Often, it’s easier to reach an end goal by saving smaller, regular amounts, and topping them up where possible – autosaving apps are a perfect example of how these costs can add up over time.

Kickstarting an emergency savings fund is one of the first steps investors can take towards financial health, future planning and getting out of any debt cycles. While gut instinct may tempt people to keep money in the bank, investment in physical assets, such as gold, offers individuals the opportunity to benefit from greater returns and peace of mind, providing that all-important safety net for whatever the future may hold.

Continue Reading

Call For Entries

Global Banking and Finance Review Awards Nominations 2020
2020 Global Banking & Finance Awards now open. Click Here

Latest Articles

Return to Work Doesn’t Mean Business as Usual When it Comes to Travel and Expense 4 Return to Work Doesn’t Mean Business as Usual When it Comes to Travel and Expense 5
Top Stories1 day ago

Return to Work Doesn’t Mean Business as Usual When it Comes to Travel and Expense

By Rob Harrison, MD UK & Ireland, SAP Concur The last few months have been an exercise in adaptability for...

Why technology is key to the future of auditing 6 Why technology is key to the future of auditing 7
Technology1 day ago

Why technology is key to the future of auditing

By Piers Wilson, Head of Product Management at Huntsman Security The Financial Reporting Council (FRC), which is responsible for corporate governance,...

Staff training crucial for SME recovery post-COVID 8 Staff training crucial for SME recovery post-COVID 9
Business2 days ago

Staff training crucial for SME recovery post-COVID

47% of UK’s top performing SMEs provide regular, formalised training for all staff Despite this, 15% of small businesses report to...

What Is Globalization 10 What Is Globalization 11
Business2 days ago

What Is Globalization

What is globalization? Globalization, or inter-connectedness, is the ever-growing process of integration and interaction among countries, individuals, businesses, and even...

What Is Microsoft Teams 12 What Is Microsoft Teams 13
Business2 days ago

What Is Microsoft Teams

Microsoft Teams is an application and web-based collaboration tool that combines chat, videos, online collaboration, document storage, and collaboration with...

What Is Capitalism 14 What Is Capitalism 15
Business3 days ago

What Is Capitalism

What is capitalism? Is it a great economic system or just another economic system that is not so great? Well,...

How To Start A Youtube Channel 16 How To Start A Youtube Channel 17
Business3 days ago

How To Start A Youtube Channel

How to Start a YouTube Channel For Your Business: Do you have a blog or website? If you do, it’s...

What is URL 18 What is URL 19
Business3 days ago

What is URL

A Uniform Resource Locater, colloquially known as a URL, is an identification to a certain web resource, a directory or...

What Is Seo 20 What Is Seo 21
Business3 days ago

What Is Seo

Search engine optimization, also known as SEO, is the process of increasing the quantity and quality of site traffic from...

How Much Rent Can I Afford. 22 How Much Rent Can I Afford. 23
Business3 days ago

How Much Rent Can I Afford.

How much rent is too much to pay? Sometimes, apartment complexes look at an annual income that’s over forty times...

Newsletters with Secrets & Analysis. Subscribe Now