Setting up an angel syndicate. 

With the upheaval in the angel and SPV space in recent months (including a few articles floating 2-year prison sentences) the number of people reaching out trying to better understand how they can set up an angel syndicate safely has increased.  
 
Considering the potential ramifications of getting it wrong, this topic should be well understood by anyone either running or looking to set up an angel syndicate. Having navigated the set-up of multiple regulated entities in this space in the UK and US has given us insight into the most common misconceptions and questions around how to safely set up an angel syndicate.  

Is running an angel syndicate a regulated activity in the UK?

The answer to this is yes.

The regulated activity this falls under is “Arranging in Investments”; the test applied is simplified to “Would the deal have happened without you?” If you are operating an angel syndicate, you fall under this criterion.  

Now the good news is that whilst you are performing a regulated activity, you don’t need to immediately run off to the FCA for an extensive (and expensive) regulatory application. There are several regulatory– light ways of running a syndicate through either exemptions or becoming an “Authorised Representative”. 

What exemptions can I use?

There are two main exemptions available under the Regulated Activities Order under articles 28 and 29.

Article 28

This exemption applies where the syndicate lead (who is receiving compensation) is also directly investing in the company. This is the typical exemption most syndicates operate under.  
 
What should you double-check?  

Here, it’s important to note that if one of the angels is investing but the fees are collected by a company, a separate legal entity and therefore the exemption does not apply. To benefit from this exemption, the entity picking up any fees or carry needs to have both invested and received any fees. 

Article 29 

This exemption applies when arranging with or through a regulated entity. 
 
If the investment is through a fully regulated arranger like Floww, this allows you to use an exemption on all investments whether you invest or not.  
 
When can’t you use this exemption?

A firm that is an “authorised representative” (more on that below) is not able to provide this regulatory cover as it is not deemed a regulated entity to provide this exemption. A number of angel syndicates have been caught out by this when leveraging or working with investment platforms that do not have their own arranger license. 

What are my options if I want to be regulated?

Regulated routes will always come at significantly higher cost vs using an exemption. A full reg license can be costly, time-consuming and exposes you to significant ongoing running costs including regulatory capital requirements.  
 
An alternative, lighter route is to become an “Authorised Representative” or “AR”. This allows you to leverage a fully regulated “sponsor” who provides you regulatory cover, oversight and processes. Becoming an AR requires registering with the FCA, paying ongoing fees to your sponsor and importantly maintaining an ongoing relationship and dialogue with your sponsor who will have their own duties to fulfil in relation to providing you regulatory cover.  
 
What should you be mindful of?  

It’s important to select a high-quality sponsor; a sponsor who is not providing oversight is likely to lose their ability to sponsor, which could ultimately take away your ability to do business. 

Why do angel syndicates use SPV’s?

There are 3 primary reasons angel syndicates use SPVs. 

Fees

The first reason is relatively simple — considering the timeframe of venture investments, at the time of an exit, any individual investor’s setup could be vastly different after a 5 years or longer investment horizon. Without an SPV, it can be difficult for a syndicate lead to receive their carry, as they may have to find the investor wherever they are now set up in the world and how ever the relationship has evolved , and get that investor to transfer them their fee.  
 
With an SPV the syndicate receives the money, the lead can take their carry and then remaining money is paid on to the investors. This ensures that syndicate leads receive their fair compensation with minimum hassle. 

Investor Management/Administration

Syndicates by definition can fragment the cap table, making it difficult to make decisions. SPVs can help solve this in a couple of different ways: either you can reassign all the voting rights to a lead investor or alternatively an SPV allows you to set the rules by which you gather consents.  
 
For example, per Companies Act, Shareholders Agreement updates must be done by deed, but for your SPV investors you can obtain consent via email; following this you only need the SPV signatory as the deed signature on behalf of all the investors. 

Privacy

All investments in the UK are filed with Companies House, and while you can maintain transparency over who the investors when using an SPV structure, some investors prefer their privacy. In such cases you can choose to only reflect the SPV in the filings, allowing investors to retain their privacy. 

Are SPVs regulated?

This is an interesting one. SPVs are not regulated themselves, however the activities carried out when managing an SPV are.  
 
You are potentially providing share custody (holding the company shares on behalf of the SPV investors) and providing cash custody (managing money movements on behalf of the SPV investors). This traditionally is a regulated activity, thus most SPV providers in the market are themselves regulated to carry out these activities.

Can I run a SPV without any regulated license?

It is being done, but it’s a grey area and involves future risk. 
 
If the SPV manager only provides share custody but uses a paying agent or similar provider to manage the cash component of the investments, this might not require any licensing. 
 
This allows you to set up your own SPV (as is done by many smaller venture funds). However, in this case the cash component must then be managed by an appropriately regulated cash custodian or paying agent.

What’s the future risk? 

It is important to note that while the UK regulator has been clear on treatment of this for smaller regulated funds, it is still somewhat ambiguous when used by a syndicate. There is future risk that the regulator treats this as avoiding appropriate regulatory responsibility, which would be very problematic if holding shares via one of these “grey” structures. 

What is the key thing?

In today’s landscape, where there is increased scrutiny of angel syndicates, it’s important to grasp these concepts to ensure you’re on the right side of regulations. And, if you’re currently running an angel syndicate, or hope to do so in the future, there’s an additional task of making sure you’re working with parties who are equally adept at navigating exemptions correctly. If you’ve got questions, don’t leave them unanswered or put yourself at risk.

Get in touch with Floww today to ensure you set up your angel syndicate safely.

The information provided in this article is for informational purposes only and should not be considered as regulatory or legal advice. Always consult with a qualified professional for advice related to your specific situation.