Mini-bonds

Find out about mini-bonds and why investors should exercise caution when buying them.

Key points

  • A mini-bond is a type of investment.
  • They typically offer high returns. This reflects the much higher risks involved compared to other types of investments.
  • A business does not generally have to be regulated by the FCA to issue mini-bonds. If you lose money there is normally no protection under the Financial Services Compensation Scheme (FSCS).
  • Think carefully before investing in a mini-bond. Do not invest any money you can’t afford to lose.
  • From January 2020, our rules ban promotions of what we call ‘speculative mini-bonds’ to retail consumers, unless the investor is considered to be ‘sophisticated’ or have a high net worth.

What is a mini-bond?

There is no legal definition of a ‘mini-bond’, but the term usually refers to illiquid debt securities marketed to retail investors.

It is essentially an IOU issued by a company (the issuer) to an investor, in exchange for a fixed rate of interest over a set period. At the end of this period, the investor’s money is due to be repaid.

The return on investors’ money depends on the success and proper running of the issuer’s business. If the business fails, investors may get nothing back

Are mini-bonds risky?

Mini-bonds typically offer high returns. This reflects the much higher risks involved in the investment.

This is because mini-bonds are usually issued by small or start-up companies, or companies that find it difficult to raise funds from institutional investors or borrow money from a bank.

This type of company could face cash flow problems that delay interest payments. It could also fail altogether and be unable to repay any of the money investors have lent it.

Mini-bonds are also highly illiquid, which means they cannot easily be converted into cash. 

Unlike shares or bonds of larger companies that are listed and traded on a stock exchange, mini-bonds do not normally have a secondary market so they cannot be sold on. Investors are usually locked in until the bond matures and cannot exit their investment early.

There are degrees of risk, and some mini-bonds will be riskier than others. As a rule of thumb, it is a bad idea to invest more than 10% of your net wealth in this kind of asset. 

You should not invest money you cannot afford to lose, or which you might need access to before the end of the investment term.

If you are considering mini-bonds you may wish to seek professional financial advice before deciding to invest.

Update on our rules

Since 1 January 2020, our rules temporarily ban promotions of what we are calling ‘speculative mini-bonds’ to retail consumers, unless an investor is considered to be ‘sophisticated’ or have a high net worth. We are consulting on making these rules permanent and you can read our proposals.

The kind of mini-bond we’re concerned about is where a company raises money from investors with the intention of lending the money to a third party or investing in other companies, or property. 

Being able to pay interest and repay the original investment depends on how the issuer’s lending or investment activities perform, which may be very risky and complex for investors to understand.

Where these products are marketed to ‘eligible’ investors, they will have to clearly state the risk of losing all the investment. They must also provide clear information on the costs and charges associated with the product.

Video: What is a speculative mini-bond? (44 seconds)

Firms issue speculative mini-bonds to raise money from investors to lend to a third party or invest in other companies or property. These investments offer high rates of return but are usually very risky.

Are mini-bonds regulated?

In general, a business does not have to be regulated by the FCA to raise funds by issuing shares or debt securities (whether mini-bonds or otherwise).

However, any investment services provided by firms in relation to these investments are regulated, and are subject to our rules. For example, if an authorised firm provides investment advice about mini-bonds, it must make sure it is suitable. 

Mini-bonds are sometimes distributed by an authorised person (eg, online investment platforms). If that is the case, that person will be subject to our rules.

In addition, financial promotions will usually need to be approved by an FCA-authorised person. They must check that the promotion complies with our rules – for example, that it is clear, fair and not misleading.

What can I do if the issuer of a mini-bond fails to pay me?

Mini-bonds are not like savings accounts. There is normally no protection from the Financial Services Compensation Scheme (FSCS) if the issuer is unable to repay investors’ capital.

This means that, if the mini-bond issuer fails, you could lose all your money. Find out more about what the FSCS covers and how to make a claim if you are eligible.

Here are some key points to remember:

  • If the issuer has been placed into administration then the administrator will assess the firm’s assets and put forward proposals as to how they will proceed. They will write to bond holders with these proposals usually within 8 weeks of being appointed.
  • If you have received a service from an authorised firm in connection with your investment in a failed mini-bond – for example, you purchased your bonds through that firm or received investment advice - you can consider complaining to that firm
  • If you are unclear on your position, then you might want to think about getting some legal advice. Most consumers should not need to involve a third party to complain to the Financial Ombudsman Service or (if eligible) to submit a claim to the FSCS. 
  • In these circumstances, you should remain alert to the possibility of fraud. If you are cold called by someone claiming to be from the failed issuer or the administrators, you should end the call and call them back using the contact details you have used previously.

Complaining about mini-bonds

If you received a service from an authorised firm in connection with your investment in a mini-bond – for example, you purchased your bonds through that firm or received investment advice – and you are unhappy with that service, you can complain to the authorised firm. Find out more about how to complain.  

If you are not satisfied with the firm’s response, you may be able to complain to the Financial Ombudsman Service.

If the authorised firm has gone out of business, you may be able to bring a claim to the FSCS.

If you purchase a mini-bond without receiving a service from an authorised person, it is unlikely that you will be able to use the Financial Ombudsman Service or make a claim to the FSCS.

Are there scams? How can I tell if a mini-bond is legitimate?

Mini-bonds can be a legitimate way for a business to raise money. 

As with many investment propositions, it can be difficult to assess if a business is run in an appropriate and knowledgeable manner, or will use investors’ money in the way it says it will. Mini-bonds are no different.

Be wary of adverts promising high returns. Be especially cautious if you’re contacted out of the blue or pressured to invest. 

Find out more about how to avoid investment scams on our ScamSmart pages.

What do you need to know before buying mini-bonds?

If you are thinking about purchasing a mini-bond, here are some general considerations:

  • Weigh the interest rate up against the risk involved. In general, the higher the rate on offer, the higher the risk.
  • Check the cash flow is healthy and consistent. Look at a measure known as the ‘interest cover ratio’. This is the ratio that shows how easily an issuer will be able to meet interest repayments on its debt. It can be a useful indication of a company’s financial health.
  • Is the money that the issuer needs to pay back to investors secured on any of its assets such as property or land? Are there other creditors who would get priority if the issuer went bust?
  • Thoroughly research all recent reports and accounts from the business you are investing in.
  • Be aware that it can be harder to judge the risk involved in investing in some bonds than in others. For example, it is easier to assess the likelihood of a large supermarket going bust than smaller and more specialist businesses.
  • If you think you are an inexperienced investor, or unfamiliar with the kind of business the issuer is in, it would be a good idea to seek independent financial advice before making your decision.
  • If you are considering making the investment through a person who claims to be authorised by the FCA, look them up on the Financial Services Register.
  • Because mini-bonds are generally risky and illiquid, it is usually a bad idea to invest more than 10% of your net wealth in this kind of asset. You should not invest money you cannot afford to lose, or which you might need access to before the end of the investment term.
  • Remember, you will not usually be protected by the FSCS if the issuer goes bust.

Can I tell how the issuer intends to use my money?

This should be included in the details of the bond offer. 

You should research the business of the issuer before purchasing a mini-bond. This will help you to judge their prospects and the level of risk involved with the investment.

You should examine the nature of the investment and how the investment and its issuer are set up. For example, if the issuer is indicating that your investment will be secured through charges over its assets, you should check that these charges exist. 

Ask to see evidence of the arrangements for holding your money before the mini-bond is issued. This is to ensure that your cash is kept separate from the issuer’s funds before it is invested.

These are often complex considerations, and the information you need may not be easily available, or may be difficult to understand. 

The safer approach is to seek professional financial advice before making the investment decision.

Can I hold a mini-bond in an Individual Savings Account (ISA)?

You can hold some mini-bonds in Innovative Finance ISAs (IFISA), but not in cash ISAs.

A mini-bond can only be held in an IFISA if it meets the requirements for crowdfunding debentures (crowdfunding debt securities) in the ISA Regulations 1998.

Only a very small proportion of existing IFISAs will include mini-bonds.

IFISA eligibility does not guarantee returns or protect you from losses. You could lose all of your money invested.

Page updates

26/11/2019: Information added Update about 1 January 2020 'speculative mini-bonds’ rule introduction and video added