Find out more about mini-bonds, the risks of investing, and how to protect yourself from scams.First published: 17/05/2019 Last updated: 20/03/2023 See all updates
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A mini-bond is a type of investment that typically offers high returns. This reflects the much higher risks involved in the investment.
While there is no legal definition of a mini-bond, it's essentially an IOU issued by a company (or ‘issuer’) to an investor in exchange for a fixed rate of interest over a set period.
The return on investors’ money depends on the success and proper running of the issuer’s business. So if the business fails, investors may get nothing back.
From 1 January 2020, we banned the promotion of speculative mini-bonds to consumers, unless they’re sophisticated or have a high net worth.
Speculative mini-bonds are sold to investors by issuers to raise money to lend to a third party, or to invest in other companies, or property.
Whether or not investors are paid interest will depend on how the issuer’s lending or investment activities perform. If they perform badly, investors could get nothing in return and could lose their original investment.
If speculative mini-bonds are promoted to high-net-worth and sophisticated investors, issuers must clearly state the risk of losing all the investment. They must also provide clear information on the costs and charges associated with the product.
In general, businesses don’t have to be authorised by us to raise money by issuing mini-bonds.
But investment services provided by firms relating to mini-bonds are regulated and must be provided in compliance with our rules. This means if an authorised firm offers investment advice about mini-bonds, it must make sure the advice is suitable.
Similarly, if an authorised person distributes mini-bonds (for example, online investment platforms), they must comply with our rules.
Risks of investing in mini-bonds
Mini-bonds are considered a high-risk investment.
This is because they’re usually issued by small or start-up companies, or by businesses that find it difficult to raise funds from large investors, or to borrow from banks.
These companies may face cash flow problems that delay interest payments. They could also fail altogether and be unable to repay any of the money you’ve invested.
Mini-bonds are also highly illiquid, which means they can’t easily be converted into cash. Unlike the shares or bonds of larger companies that are listed and traded on a stock exchange, mini-bonds don’t normally have a secondary market. This means they can’t be sold on. Investors are usually locked in until the end of the investment term.
As with other investments, there are degrees of risk. Some mini-bonds will be riskier than others. But, as a rule, it’s a bad idea to invest more than 10% of your net wealth in this kind of asset.
If the issuer fails to pay you
If you invest in mini-bonds, there’s normally no protection from the Financial Services Compensation Scheme (FSCS).
This means that if the mini-bond issuer fails, or is unable to repay your investment, you could lose all your money.
If the issuer goes out of business, the administrator will assess the firm’s assets and decide what to do next. They will write to you, as an investor, with their proposals, usually within 8 weeks of being appointed.
Beware of fraudsters
If an issuer goes out of business, or can’t repay your investment, there’s a chance you could be approached by fraudsters.
If you’re cold-called by someone claiming to be from the failed issuer, you should end the call and call them back using the contact details you’ve used before.
If you’re called by someone claiming to be the administrator, end the call and call them back using the contact details in the FS Register.
Before buying mini-bonds
If you’re thinking about buying a mini-bond, make sure you consider the following points.
- 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 out of business?
- Thoroughly research all recent reports and accounts from the business you are investing in. This will help you to judge its 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 and who the charge is registered with.
- How the issuer intends to use your money should be included in the details of the bond offer.
- Ask to see evidence of the arrangements for holding your money before the mini-bond is issued. This is to make sure that your cash is kept separate from the issuer’s funds before it’s invested.
- Be aware that it can be harder to judge the risk involved in investing in some bonds than in others. For example, it’s easier to assess the likelihood of a large supermarket going out of business, than smaller or more specialist businesses.
- If you think you’re 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’re considering making the investment through a person who claims to be authorised by the FCA, look them up on the FS Register.
Remember, you’ll not usually be protected by the FSCS if the issuer goes bust.
How to protect yourself
You shouldn’t invest any money you can’t afford to lose, or which you might need before the end of the investment term.
Even though mini-bonds can be a legitimate way for a business to raise money, it can be difficult to know if the business will use your money in the way it says it will.
You should also always be wary if you’re contacted out of the blue, pressured to invest quickly, or promised returns that sound too good to be true.
If you're contacted unexpectedly by a financial business or individual, make sure you reply using the contact details on the FS Register.
Find out more about how to protect yourself from scams.
Mini-bonds 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 doesn’t guarantee returns or protect you from losses. Being in an IFISA doesn’t change the risk of investing in a mini-bond.
26/11/2019: Information added Update about 1 January 2020 'speculative mini-bonds’ rule introduction and video added