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Although the economic force that drove the Industrial Revolution of the eighteenth century owed much of its strength to individual investors in public share offerings, successive British governments in the post-Depression era passed increasingly restrictive legislation on their investment markets. For example, the Prevention of Frauds Act 1936 forbade any company being listed on a UK stock market unless it had three consecutive years of profits. It was also a criminal offence in the UK to issue information about an investment opportunity unless said information had been prepared by a recognised City institution.
The effect of these measures, intended to protect the public from the risk of fraudulent share offerings, had been to close the London capital markets to all but existing, profitable businesses. It also cut off the free flow of investment information to the public, creating a powerful layer of intermediary institutions and their instruments, such as investment trusts, unit trusts, investment bonds and hedge funds, which controlled all investment funds for their own profit.
The Real Time Capital Dilemma
Technology start-ups had no access to these risk-averse sources of capital and could not afford the onerous burden of bank loans. The Real Time Club was not alone in its growing concern at the number of entrepreneurs who were taking British developments to US markets, where access to venture capital was much less restricted.
Through its earlier activities in the investment arena, the Club had established its credentials with prominent members of both the finance sector and the Treasury. As a result, when the Bank of England produced a report entitled The Financing of Technology-based Small Firms in late 1996, the Deputy-Governor of the Bank, Mr Howard Davies, invited the RTC to participate in the ensuing public debate.
In July 1997 the Real Time Club produced is own report, A Reasoned Response to the Bank of England Report, which was widely circulated throughout Government and the Financial Services community. In it, the Club noted that the Bank’s report concerned itself mainly with the funding of existing small enterprises, and paid scant attention to the specific problems faced by start-ups.
A four-point strategy was proposed in A Reasoned Response, including:
– changes to taxation to increase the overall supply of venture capital,
– legislation to give the public easier access to investment opportunities in unquoted software firms,
– more active management support for start-up ventures from the investment firms, and
– more proactive procurement support from government to help accelerate the development of markets for British high tech products.
The public debate on these issues was particularly important because the government was due to pass a new Financial Services Act in 1998/9. As these Acts are passed only once in every ten to fifteen years, there was a limited window in which to ensure that the industry could live with the resulting legislation well into the next millennium.
Accordingly, the RTC prepared a formal submission to the Treasury (Funding Technology-Based SMEs; Key Issues to be Resolved in the 1998/9 Financial Services Act and/or Other Legislation, March 1998) outlining its core recommendations, which were for the government to:
– provide a mechanism to enable entrepreneurs to seek public subscription much more easily and at much lower cost than is presently the case, and
– adapt UK legislation and regulations to the likely developments over the next decade in the Internet-driven Global Investment Market.
Following publication of the first draft of the government’s Financial Services and Markets Bill, the Real Time Club became a major player in the ensuing consultations involving the Treasury, the Financial Services sector and the high tech industry. Members of the Finance Caucus attended hundreds of meetings with over thirty organisations and responded in detail to Consultation Documents issued by both the Treasury and the Financial Services Authority (Public Offers of Securities, Regulated Activities and Financial Promotion, A New Approach to the Information Age, and The Permission Regime).
In June 1998 representatives of the Real Time Club were invited to a private Venture Capital conference organised by the Treasury. The event gave the RTC delegates an opportunity to learn directly from Chancellor Gordon Brown and European Commissioner Mario Monti about their plans to standardise rules for investment across the EU. The Club believed these plans would unduly curtail UK entrepreneurs’ access to the capital they needed, and consequently sent a detailed memorandum to Mr Monti outlining its concerns.
It is interesting to note that the RTC was the only organisation involved in the government’s round of consultations on these issues that directly represented the interests of the ICT community itself.
The central theme of the Club’s argument was that the Government’s responsibility was to protect the public from the risk of fraud, not from commercial risk. Specifically, the Club proposed that “any member of the public should be able to prepare and register a prospectus and solicit funds from the public” with similar levels of simplicity and safeguards as already applied to the registration of a new limited liability company.
Over the eighteen month consultation period, the Club worked on several ideas, including simplified sub-sets of the public offer of securities (POS) rules for start-up ventures, a loss compensation fund to help investors caught up in genuinely fraudulent offerings, and the facility for wider investment solicitation via the Internet.
The intensity of the Club’s lobbying during this period prompted one DTI official to comment:
“I must admit that before we first met I had never heard of the Real Time Club. Now, wherever I go in the Treasury or the DTI, or even in much of the City, the name keeps cropping up.”
During the course of the campaign, several members of the RTC participated in a debate at the Oxford Union at which Bob May, in his role of government Chief Scientist, was speaking. The RTC delegates made the point that if the provisions proposed by the government in the Financial Services and Markets Bill had been in force in the 1800’s, the Industrial Revolution would never have been able to gather steam in Britain! Bob May asked the Club to submit a paper on their proposals, which they did with typical Real Time Club irony.
Working in association with the Smaller Quoted Companies Alliance and the Centre for the Study of Financial Innovation, the Club eventually concentrated effort on Clause 19 of the draft Bill, which repeated provisions contained in earlier legislation making it a criminal offence to communicate unauthorised information regarding investment opportunities. The government itself had already recognised the unworkability of this clause and was drafting a list of exemptions.
The Real Time Club’s solution to the problem for IT entrepreneurs was a concept they called the ‘Sophisticated Investor’, the purpose of which was to remove the onus of investor protection from the government. Rather than merely suggesting this idea to the Treasury, however, the chairman of the Club’s caucus invited a long standing friend, the SQCA’s solicitor, Tom Mackay, to draft the exact wording of an exemption, which allowed investors to self-certify that they were aware of and able to afford the risk that investment entails, thereby de-criminalising the act of passing on information about un-regulated investment opportunities.
The RTC’s exemption went unchallenged throughout the rest of the consultation period, and therefore remained in the Bill which was eventually passed through Parliament and enacted as the Financial Services Act 2000. Referring to this triumph, Dr Andrew Hilton, Director of the Centre for the Study of Financial Innovations remarked to a meeting of his members that “the Real Time Club has won”!
The Real Time Club’s exemption is still invoked daily by thousands of Business Angels seeking to invest in start-up and small ventures across all industry sectors. It has made a significant contribution to expanding the pool of capital available for new start-up businesses in the UK.
Budget Submissions
Among the Club’s many proposals for increasing access to and the availability of funding for ICT entrepreneurs had been a number of measures that would fall within the remit of the federal budget. During the course of consultation, DTI officials advised the Club to represent these particular recommendations to the Treasury in a formal Budget Submission.
CSSA Director General, Rob Wirszycz offered to participate in this project, and a Joint Submission was sent to the Chancellor in September 1997. Subsequent submissions were prepared in each of the following three years, covering a number of issues and recommendations, including:
– Start-up funding through government sponsored schemes, such as the Loan Guarantee Scheme and the Enterprise Investment Scheme
– Formation costs
– Corporation tax treatment of new business start-ups
– Capital gains tax
– First-year depreciation of ICT assets
– Directors’ personal legal and financial liabilities
– IPR protection costs
– Share options for Directors and employees
The Treasury never acknowledges direct influence on its budgetary measures, but it is certain that officials would have had greater awareness of the concerns of ICT businesses as a result of the Real Time Club’s input.
Looking Ahead
By virtue of the high profile the Real Time Club had earned during the Treasury Consultations, it was invited to join in several other initiatives concerned with the future of the Financial Services sector.
In 1998 the Office of Science and Technology’s Financial Services Foresight Panel launched a public consultation. Under the heading ‘Scenarios for 2010’, it was tasked with exploring potential barriers to the development of the ICT industry. Ian Bond, Head of the Markets and Trading Systems Division at the Bank of England invited the Club to contribute to a scenario which he had been asked to prepare on the retailisation of capital markets.
One outcome of the Club’s extensive investigations and consultation on the Financial Services Act was a deeper understanding of the likely effect that developments in ICT such as the Internet would have on the operation of banks and equity markets. Accordingly, their concerns and recommendations were summarised in a report, The Future Use of Electronic Technology in Cash Transactions, Banking and Share Trading, which was circulated in early 1999.
When, later that year, the government launched its consultations on electronic commerce, the Real Time Club was invited to submit its comments and was again able to claim influence on the subsequent draft Electronic Commerce Bill.
One of the most noteworthy events of the decade for long-term Club members was a comment made by the Prime Minister in a 1999 speech to the Venture Capitalists Association in London. As noted in the RTC Update for that year, the Labour PM said he:
“wanted to change the instincts of the … elite … who regarded entrepreneurs as beneath them … and looked down on people who had an idea, developed it and went out and made money.”
The Club was so pleased with this apparent change in attitude that it wrote to the Prime Minister thanking him for:
“the first occasion in our collective careers that anyone can recall any British politician paying any compliments to Entrepreneurs!”