Finance Glossary

Sturgeon Ventures is building up a glossary of the well used terms within our industry.  We have listed the top words and their meanings.

AIF

An Alternative Investment Fund.
An alternative investment fund is a fund that contains investments that do not fall into the three main asset types. The three main types of asset are stocks, bonds and cash assets. An alternative investment fund is something that sits outside this group, with possibly the most common kind of alternative investment fund being the hedge fund. They are historically held by high net worth individuals or companies that have high levels of capital to invest with.

AFMID

Alternative Investment Fund Managers Directive.
The AFMID was published in the Official Journal of the European Union on 1st July 2011 and was enveloped into UK law on 22nd July 2013.

AFMID Requirements

The demands are quite extensive and include providing information to the FCA on the following issues:

• Information about the persons who are actually conducting the business of the alternative investment fund manager. This means identifying the personnel who carry out the work that manages the funds.
• A full program of activity that is connected to the fund management. This is an outline of all the processes and mid to long-term plans that the AIFM has. The information required here is extensive.
• The remuneration policies and practices of the fund managers also have to be outlined. The level of detail here is again extensive, and hints at the transparency that has resulted due to the directive being put into place.
• The fund managers also have to be quite clear on the details of any arrangements for the delegation of activities to third parties. This again illustrates just how transparent the process is in the wake of the global financial meltdown. The European Union is obviously aiming at finding out everything it can about the practices of alternative investment fund managers. This is an attempt to push towards the full transparency of financial processes.
• When it comes to the funds that they want to manage AIFMs also have to give full information on the investment strategies they intend to follow. This is different to what came before, and again illustrates just how much information is required until the European Union are satisfied that all dealings are transparent and have integrity.

Appointed Representative (AR)

An AR is a person or firm who conducts regulated activities under the umbrella of a firm directly authorised by the FCA. The directly authorised firm is known as the AR’s ‘principal’ and this is the role commonly undertaken by the host firm. The host firm takes full responsibility for ensuring that the AR complies with the FCA rules and the AR is therefore able to carry out advising and arranging services by being authorised under the umbrella of the host. The client firm cannot conduct any activity which does not fall within the scope of its host’s permission.
If the firm wishes to carry on regulated activities wider than the host firm’s scope, then it must obtain authorisation in its own right or enter into appropriate alternative arrangements with the host.

Asset Management Authorisation Hub (FCA AMAH)

The FCA launched its Asset Management Authorisation Hub to help and guide firms through the FCA authorisation application process and beyond. There is a dedicated portal and case workers to clarify, provide information, engage firms and provide support from beginning to the end of the process.
Further information: FCA Asset Management Authorisation Hub.

CBA

Cost-benefit analysis.

COBS

Conduct of Business Sourcebook.

Consumer Duty

FCA Policy Statement

From time to time the FCA issues Consultation Papers always called CP and a number this is followed by a change in FCA Approach/Rules

They come out as Policy Statements and are known under an Acronym PS xx/x. Example In July 2022

The FCA Released the new Consumer Duty Policy Statement:

PS22/9: A new Consumer Duty | FCA

We are introducing rules comprising:

A new Consumer Principle that requires firms to act to deliver good outcomes for retail customers.
Cross-cutting rules providing greater clarity on our expectations under the new Principle and helping firms interpret the four outcomes (see below).
Rules relating to the four outcomes we want to see under the Consumer Duty. These represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers.
These outcomes relate to:

• products and services
  price and value
  consumer understanding
  consumer supportOur rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey. As well as acting to deliver good customer outcomes, firms will need to understand and evidence whether those outcomes are being met.

Who this affects

This policy and guidance is likely to interest:

• regulated firms, including those in the e-money and payments sector
• consumer organisations and individual consumers
• industry groups/trade bodies
• policy makers and regulatory bodies
• industry experts and commentators
• academics and think tanks

Next steps

The rules and guidance we are introducing come into force on a phased basis:

• for new and existing products or services that are open to sale or renewal the rules come into force on 31 July 2023
• for closed products or services, the rules come into force on 31 July 2024

Critical Third Parties (CTPs)

Critical Third Parties (CTPs) is a term used regularly by Financial Services companies in relation to Outsourcing continuing on from their work on operational resilience.

CP

Consultation Paper.

DP

Discussion Paper.

Early Life Supervision Support (FCA ELSS)

This is an initiative from the FCA that can be found on their Asset Management Authorisation Hub (AMAH see above). The purpose of ELSS is to guide and support newly authorised asset management firms. Guidance includes such topics as return submission, system registration and support events.
Further information: FCA Early Life Supervision Support

Enterprise Investment Scheme (EIS)

The UK Government introduced the Enterprise Investment Scheme (EIS) in 1994 to encourage investment in small unquoted qualifying companies .The Scheme is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies . The investor and the company must satisfy the rules of the scheme as laid out by HMRC in order to take part.

ESMA

From the Wikipedia Definition
The European Securities and Markets Authority (ESMA) is a European Union financial regulatory institution and European Supervisory Authority, located in Paris. ESMA replaced the Committee of European Securities Regulators (CESR) on 1 January 2011.

FCA

Financial Conduct Authority.

FCA Authorisation

A firm wishing to provide marketing and advisory services in the UK generally needs to be authorised by the FCA. The application process to become authorised can be costly and time-consuming (an application can take up to 6, or possibly 12, months) and the firm would need to put up regulatory capital, have a detailed business plan, have sufficient investment staff, appoint a compliance officer and a money laundering officer and set up its own offices. If there is no immediate intention to manage investments, then becoming an appointed representative (AR) may be a cost-effective solution – see definition of Appointed Representative above.

 FCA Register

The FCA Register is a public register of all firms and individuals the financial services industry that are regulated by the FCA in the UK.

• authorised by FCA to do business
• registered by the FCA to undertake regulated activities
• approved by the FCA to provide products or services

Flat Rounds

What exactly is a flat round?

A flat round occurs when a company is raising finance at the post-money value of their previous fund raise. For example, if company A previously raised £500,000 at a pre-money value of £2,000,000 and are now raising another round at one of £2,500,000, this would be considered a flat round.

Flat rounds are not uncommon; around half of follow-on’s I have tracked had flat rounds.

Why people fear the flat round

Flat rounds are often associated with companies that are performing poorly and can be a signal that something is not right with either the team or the product. Most flat rounds occur when money is running out but the milestones/targets that were meant to be hit have not been achieved. Other times, a flat round may occur because the market fit was not right for the product, or the technology was too early and the market not yet fully developed. The company is running out of money so it needs to raise or risk going out of business.

In principle, they haven’t achieved what they said they would so they cannot justify a higher valuation.

Beyond the lack of milestones/progression to justify an up round, there is an accompanying psychological element to a flat round that must be considered.

In effect, with a flat round the founders are being further diluted (ie their share holding getting smaller), as are the original investors – and some take this to heart. As Dennis Keohane, former Senior Staff Writer at The Boston Globe, puts it, ‘Start-ups are as much a mental game as anything else, and it’s demoralising to toil away for a year only to hear that you’ve somehow destroyed value in the thing you are creating.’

The post-raise impact of a flat round must be monitored closely and, the right set of incentives must be given to ensure the entrepreneur is still fully committed to the cause.

Despite all of the above, a flat round does not necessarily mean that the company is not investable.

Quite the contrary: in some instances a flat round may provide a better opportunity for investors, particularly as it can serve as a form of market correction. Early investors may have invested at a high valuation as a result of the hype surrounding the idea. While the milestones and targets may not have been hit, that does not mean that the idea has lost value. But, as the company requires more money to hit the objectives, an investor can re-invest at a potentially fairer value, in a company that is further along than it was when the original investment took place.

How to approach a flat round

Flat rounds are tricky, so the best thing to do is approach the round as if it were a new company and a new round. Would you invest if this was the first round in which you were asked to?
If your answer is ‘yes’, you then need to take into account what you do know. Does the team work hard? Do the founders still have a passion for what they’re doing? Do they communicate with you well? This is one of the most annoying issues. I have invested through crowd funding websites but have never heard from the website or the company again. I am deemed a Sophisticated Investor and if there was another round, they would be in touch. I want to know updates good and bad ready for any follow up round, so I am not diluted and follow my investment in all cycles.

A flat round should never come as a surprise and, if it does, the entrepreneurs have not done their job properly.

It’s fair to say that if the technology is still right, if the market is forming and if the team members are just as passionate about what they are doing, you would go for more.

When shouldn’t you follow-on in a flat round?

There are four main reasons why one might not participate in a flat round:

When one has lost faith in the ability of the team to deliver

Some companies have all the stars aligned for them and then fail to execute. Some make excuses, some make repeated mistakes. An entrepreneur should always own up to their mistakes, and prove that they have learned from them and will not make them again.

When the technology just can’t work

There are times when, regardless of how sound the idea, there is just no way to bring it to life. Some entrepreneurs really are too far ahead of their time and it’s best to leave the venture where it is, and maybe in a few years other advancements will occur that enable the project to be revisited again.

If one of the founding members leaves

Angels back teams and, generally, when one of the founders leaves it’s a pretty big indicator that not all is well in the company, regardless of what the remaining founders say. There are some valid reasons why a founder may leave but, in most cases, if one goes, the investment goes.

If they have never communicated with you since they got your cheque

The management believes they have your money and you simply let them get on with it and they do not want to share their “secrets” good or bad. Most start-ups keep dreaming with a cup half full, most seasoned investors know every venture investment is looking at a cup half empty and if they get a winner, it makes up for many losers.

FOS

Financial Ombudsman Service FPO Financial Promotion Order.

FSCS

Financial Services Compensation Scheme.

FSMA

Financial Services and Markets Act.

IBCF

Investment‑Based Crowdfunding.

LTAF

Long Term Asset Fund.

NMMI

Non‑Mass Market Investment currently a Non Mainsteam Pooled Investment (NMPI) a non-regulated Fund.

NMPI

Non‑Mainstream Pooled Investment.

National Private Placement Regime (NPPR)

The NPPR is a system that allows AIFMs to sell and promote AIF’s that are not permitted to be sold or promoted under the AIFMD domestic market or passport systems.

NRRS

Non‑Readily Realisable Security.

MAD

Market Abuse Directory
To read more on MAD – see Morgan Lewis’ article

Management Responsibilities Map

From the FCA Definiton
The Management Responsibility Map exists to help the firm and the FCA satisfy themselves that the firm has a clear organisational structure (as required by SYSC).  It also helps the FCA to identify who it needs to speak to about particular issues and who is accountable if something goes wrong.

MAR 

Market Abuse Regime
From the FCA definition:
MAR will strengthen the existing UK market abuse framework by extending its scope to new markets, new platforms and new behaviours. It contains prohibitions for insider dealing and market manipulation, and provisions to prevent and detect these. It will apply from 3 July 2016.

Micro-enterprise

(from the FCA handbook)

An enterprise which:

(a) employs fewer than 10 persons; and
(b) has a turnover or annual balance sheet that does not exceed €2 million,
and in determining whether these criteria are met articles 3 to 6 of the Annex to the Micro-enterprise Recommendation must be applied.

67 PS22/10 Annex 3 Financial Conduct Authority Strengthening our financial promotion rules for high‑risk investments and firms approving financial promotions Abbreviation Description

UCIS Unregulated Collective Investment Scheme All our publications are available to download from www.fca.

MIFID II

The FCA definition is:
The Markets in Financial Instruments Directive (MiFID) is the framework of European Union (EU) legislation for: investment intermediaries providing services to clients in relation to shares, bonds, units in collective investment schemes and derivatives (collectively ‘financial instruments’).

P2P

Peer‑to‑Peer.

Peer-to-peer, also known as P2P, means connecting investors directly with individual borrowers, often through an online platform. Because peer-to-peer investing is managed entirely online, there are reduced overheads.

Passport

A passport allows an individual the right to move freely from one country to another after having registered and provided various personal details to the authorities of his country. Once he has a passport, he does not need to register in other countries.

Regulatory Umbrella Company

A company that has been authorised by the FCA (http://www.fca.org.uk/) to manage your UK market entry and introduce you to committed and established companies across a range of professional disciplines.
The FCA has created regulations that are rigorous and exacting and all Umbrella companies must adhere to.

RMMI

Restricted Mass Market Investment.

RRS

Readily Realisable Security.

S21 approver

Section 21 Approver.

Seed Enterprise Investment Scheme (SEIS)

The Seed Enterprise Investment Scheme (SEIS )was launched by the UK government on 6 April 2012 it complements the existing EIS. The SEIS is intended to recognise the particular difficulties which very early stage higher risk companies face in attracting investment by offering a range of tax reliefs to investors in return for investment in early stage start-up businesses in the UK who satisfy the qualification criteria.

SIS

Speculative Illiquid Security.

Small and Medium-sized enterprise

(from the FCA handbook)

(1) (in MAR 5) companies that had an average market capitalisation of less than €200,000,000 based on end-year quotes for the previous three calendar years.

(2) (in PR) (as defined in article2.1(f) of the prospectus directive) companies, which, according to their last annual or consolidated accounts, meet at least two of the following three criteria: an average number of employees during the financial year of less than 250, a total balance sheet not exceeding €43,000,000 and an annual net turnover not exceeding €50,000,000.

For accounting purposes Companies House defines a small business as employing less than 50 people and a turnover under £6.5 million and a medium business as less than 250 employees and a turnover under £25.9 million.

Tel: 0203 167 4625
Email: hello@sturgeonventures.com
See our FCA listing at:
http://www.fca.org.uk/ and search register

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