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13 Feb 2020

AFC Wimbledon football club mini-bond offers up to 4% returns: should you invest?

Which? explains the new investment offer and the risks to consider

AFC Wimbledon football club's owner has issued a new bond giving investors and fans the chance to earn interest of up to 4% annually. But does it massively downplay the risks involved?

Mini-bonds have become a popular way for smaller companies to raise money. With the promise of bumper rates of return and/or perks like supporting your local club, burritos and beer, these investments can be very attractive.

However, the Financial Conduct Authority (FCA) has temporarily slammed the door on marketing some mini-bonds, after a series of high-profile collapses and concerns over the way these products have been advertised to ordinary savers.

Here, Which? takes a closer look at how mini-bonds work and whether they're a risk worth taking.

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What does the Plough Lane Bond offer?

The Plough Lane Bond is a mini-bond issued by AFC Wimbledon's fan-owned, The Dons Trust.

It requires you to invest a minimum of £1,000 (with no maximum) to the football club in return for annual interest and your investment paid back after your chosen period of five, 10 or 20 years.

In return for lending money, you can get a variable interest rate of up to 4% annually and your capital returned after the term you've chosen. Plus of course, if you have a strong link to the club help them get the money they need to finish the stadium.

Before bringing the bond to market, the club received pledges of more than £3.5m pre-launch, at an average chosen interest rate of 1.66% (you can pick to receive no interest at all if you have money to spare) and an average term length of 12.5 years.

The football club hopes to raise £5m towards the £11m total funding required to complete its stadium in Plough Lane, with an initial deadline of 14 February - though you may be able to purchase the bond after this date.

At the time of writing, the club had received pledges of over £3.7m.

How risky are mini-bonds?

Mini-bonds typically offer bumper returns but can also be relatively modest like in the case of AFC Wimbledon's offering.

Whatever the rate on offer they are usually issued by small firms and start-ups who may find it difficult to raise money from institutional investors such as banks - so carry much higher risks.

This type of firm is more likely to face cash flow issues that delay interest payments, or the company could go bust and be unable to pay any money back to investors.

In addition to this, mini-bonds are highly illiquid - which means they cannot easily be converted into cash. They don't normally have a secondary market so they can't be sold on, which can make it difficult to get your money out.

Also, bondholders don't have the same status as shareholders so you won't necessarily have control over the activities of the company you're invested in.

The return on investors' money is subject to the success and proper running of the bond issuer's business.

Are some mini-bonds safer to invest in than others?

It's difficult to assess the overall risks of mini-bonds, as they are linked to the fortunes of the company that issues them.

The FCA's new marketing ban which came into force in January applies to 'speculative' mini-bonds. These cover 'complex' and 'opaque' arrangements where the funds raised are used to lend to a third party, invest in other companies or purchase or develop properties.

There are various exemptions to the ban including:

  • Listed mini-bonds
  • Companies which raise funds for their own activities
  • Funding a single UK property investment

But this does not necessarily mean such mini-bonds are safe to invest in.

For example, in 2018 Mexican food chain, Chilango, issued a mini-bond giving investors the chance to earn interest of 8% as well as a number of perks, including free burritos, to fund its business activities.

Hundreds of people invested over £3.7m into its mini-bonds, but last year it came to light that the chain is struggling to stay afloat.

Before Christmas investors were given the option of either receiving 10p in every £1 they invested or swapping their mini-bond debts for debt-like shares, which promised returns sometime in the future - but this is not guaranteed.

Can mini-bond investors receive compensation for losses?

Generally, mini-bond investors will not be compensated for their losses.

One of the most prominent examples of this is the collapse of London Capital and Finance (LC&F) last year, which saw almost 12,000 people lose a total of £237m after buying its mini-bonds.

This was the case that spurred the FCA's decision to ban marketing on these 'speculative' products.

While the firm itself was authorised by the FCA to give financial advice, the sale of mini-bonds is not a regulated activity.

Unregulated investments are generally not protected in the same way as regulated savings and investments, and usually can't be recouped through the Financial Services Compensation Scheme (FSCS).

However, so far it has come to light that 159 people who transferred out of stocks and shares ISAs to invest in LCF bonds will receive compensation from the FSCS. This is because these bondholders were given 'misleading' advice, which is a valid claim for FSCS compensation.

The FSCS won't be able to compensate 283 other victims, because they dealt with LCF before it was authorised to carry out financial services business in June 2016.

The rest of the claims are expected to be reviewed in the first quarter of this year, although the FSCS has said it's likely a large chunk of investors will not get any compensation.

How to keep safe if you invest in mini-bonds

If you're considering buying mini-bonds, you may wish to seek professional financial advice before jumping in.

As a rule of thumb, the FCA says it's a bad idea to invest more than 10% of your net wealth in this type of investment.

You should also always search the firm issuing mini-bonds first, as these high-risk investment products could be a scam.

The FCA has spent £150,000 since the start of the year promoting warnings about dodgy high-risk investment schemes in Google search results and has admitted it's 'powerless' to stop them from appearing, so you need to be really careful when doing your research.

You should always check Companies House to see whether a firm is registered as a UK company and search for the names of directors. You should also see whether the firm's registered with the FCA, and look at its warning list to check if you're dealing with a known scam.

You can find out more about how to avoid investment scams on the FCA's ScamSmart pages.

What are your other investment options?

There is an element of risk with all investments, but some are riskier than others.

Corporate bonds are a similar, but less risky, alternative to mini-bonds. They are essentially loans to companies in exchange for a set rate of interest.

They are seen as riskier than government bonds, also referred to as gilts, as companies are generally considered to be more likely to default on debt than stable governments.

Corporate bonds tend to offer a higher rate of interest to reflect this extra risk. With these investments, the company that issued it could default on repayments, although there is a secondary market so you can sell them before the end of the term.

You can also get FSCS protection if buying corporate bonds as part of an investment fund.

However, it's important to remember that the FSCS won't bail you out if your investments perform badly, but you may be entitled to compensation if the authorised company goes bust.

If you want to invest, it's crucial to assess your finances and ensure you have the necessary safeguards in place.

It's always wise to divide your investment between different assets such as cash, bonds, shares and property.

We have put together some example portfolios, with increasing levels of risk, as a starting point for a conversation with a financial adviser.