As defined by the Equity Trading Act (UK), an Alternative Funding Provider is defined as any individual who offers, by way of subscription or otherwise, capital to an Alternative Funding group, whether or not that provider is a licensed dealer. The Act also states that a crowdfunding platform is any legal or natural individual who offers or provides alternative capital funding services outside the UK jurisdiction, and that is not a licensed broker.
An “alternative capital funding service” is simply the sale, through a website or any other electronic means, of an investment instrument issued by a non-regulated investor. To qualify as an Alternative Funding Provider, an investor must be registered under the Alternative Funding Provider’s scheme and comply with the terms and conditions set out by the Alternative Funding Provider. Once established, an Alternative Funding Provider may offer either secured or unsecured loans, but cannot act as a lender or broker.
The first Alternative Funding Service has launched nearly five years ago in London. At that time, few people knew much about Funding Services, especially as many were not aware that they had been around for quite a while. Much of the initial work involved registering with local Funding Service Providers and setting up business relationships with the various investors who would then provide funding to those businesses.
The purpose of this initial work was to build up a network of regular funding sources that could be used when an investor saw a potential deal that did not fit within his/her group of hobbies, interests, or qualified businesses. This initial network also made it easier to identify potential funding sources and find funding much more quickly, making it possible to raise money over a wider range of projects.
This kind of equity setup works well with certain types of businesses that are relatively stable, have long histories, and/or have a solid business plan with a significant amount of forwarding thinking. These businesses can raise a significant amount of equity quickly and easily since they have a history to show potential investors. For this reason, they can also provide a relatively low risk/reward profile for investors.
Additionally, some equity Partnerships allow investors to receive payments from the income of other businesses which operate within the same structure. In essence, this allows investors to create two revenue streams that they can capitalize on and/or use to generate additional equity for their Alternative Funding Services.
When using an equity setup, this essentially means that the equity partner will purchase shares of a business through a business valuation process. The valuation is typically done through private placements. After the valuation is completed, the equity partner will make an offer to purchase the shares of the business from the current owners.