Investing in start-ups and early stage businesses involves a very high level of risk, including illiquidity, lack of dividends, loss of investment and dilution, and it should only be done as part of a diversified portfolio.
Shares and debentures (loans) issued by a private company are unquoted securities which may therefore be difficult to sell or obtain reliable information about their value or how risky they are. Proper information for working out the current value of investments may not be available.
Movement Capital does not provide a secondary market for the sale of securities nor does it independently value them on your behalf.
Risks associated with minority interests in non-readily realisable securities (such as those promoted by Movement Capital) are very high and if you require your capital in the near term these investments are unsuitable for you.
Investors must ensure they are fully aware of the risky nature of this type of investment before committing to invest. The taxation notes within this Information Memorandum are merely a brief summary and should not be viewed as constituting tax advice. If in any doubt whatsoever, an Investor should not subscribe. It is strongly recommended that Investors seek appropriate independent advice from their financial adviser or other suitably qualified professional adviser.
For the purposes of these Risk Factors "Companies" means any and all companies about which information appears on wearemovement.com and/or which Movement Capital Limited introduces to Investors.
The following risk factors should be considered but it should be noted that these are not exhaustive and not in any particular order of priority.
Potential Investors should be aware that the various Tax Advantages currently available might change in future. This document is based on the understanding of the existing law and HMRC practice as at the date of this document, which may change in the future. Future changes to the tax legislation may adversely affect the performance of the Companies and the returns to the Investor.
1. Fluctuations in value. The value of Investments and income from the same can go down as well as up. If you cannot afford a total loss of your Investment or sums invested in acquiring it, you should not consider subscribing for Shares. It is not intended that any income or capital will be realised by Investors for at least three years. Even then it may be difficult to sell an Investment in the Companies or to obtain accurate information about its worth.
2. Non-Readily Realisable Investments. The Companies are unlisted. You should be aware that there may be difficulty in selling such securities at a reasonable price and, in some circumstances; it may be difficult to sell them at any price. You should not invest unless you have carefully thought about whether you can afford it and whether it is right for you.
3. Management. Unquoted companies typically have small management teams and are highly dependent on the skills and commitment of a small number of individuals. The loss of a key individual can have a significant effect on the Companies' business and the returns on Investment in the Companies.
4. Investment term. Investment in the Companies should not be viewed as a short-term investment and Investors should be prepared to invest for at least five years.
5. Financial Services Compensation Scheme. The Financial Services Compensation Scheme or similar arrangement is not available for claims related to the subscription for, or the performance of, the securities.
RISKS RELATING TO THE INDUSTRY
6. Market Demand. The detailed financial projections (if any) may be based on the assumption that the industries in which the Companies are operating are in high demand. If this demand does not fully materialise then it could possibly affect the Companies' profitability and the returns on investment in the Companies.
7. Competition. There are competitors in the market and there is no guarantee that the Companies will continue to have unique selling points or differentiators over the next 5 years. The Companies will need to continually re-position themselves to mitigate this risk.
8. Delivery. There is risk associated with delivering projects. The Companies will need to deploy low risk project methodologies to reduce this risk, backed up by appropriate legal provisions.
9. Resource. It may be difficult to recruit or sub-contract the quantity of people with sufficient calibre required to meet the financial projections. This could adversely affect the Companies' profitability.
10. Operating risks. There are risks associated with managing a rapidly growing, emerging business in frontier and emerging markets. Even though the Directors have been through this many times, there is no guarantee that all operating risks will be fully covered. This could adversely affect the Companies' profitability and returns on Investment in the Companies.
11. Impact of Initial Charges and Costs. There will be various initial charges and set up costs and there will be other ongoing fees and expenses as identified in the detailed financial projections. You should be aware of the fee structure in assessing the returns you can expect from your Investment in the Companies.
12. Payment in other currencies. The contracts to purchase software and services may provide for payment in Euros or USD so that the Companies are exposed to adverse currency fluctuations. If the Euro or USD strengthens against Sterling it could materially increase the cost of sales by the Companies and impact the return on Investment in the Companies.
13. Interest payments on debt. The Companies intend to finance their acquisitions and working capital, in part, by way of debt finance. While the Companies may enter into appropriate interest rate hedging arrangements, a rise in interest rates is likely to adversely affect the Companies' profitability and return on Investment in the Companies.
14. Availability of debt funding. Indications received to date are that debt funding for the development of the Companies should be available to the Companies. However the extent, nature, and terms of that financing has not been finally settled or secured in legal documentation. Monies raised under the Offer will be raised to fund working capital and fund a potential acquisition. In the event that any bank selected by the Directors changes the terms on which debt finance is available or withdraws its offer of funding the development of the Companies may be adversely affected and this might impact returns on Investment in the Companies.
RISKS FOR FRONTIER & EMERGING MARKET ENTITIES ("FEMEs") OR "PORTFOLIO ENTITY" INVESTMENTS
15. Prospective Investors should be aware that an Investment in the Companies involves a high degree of risk. There can be no assurance that an investor will receive any return of its capital. The following considerations, among others, should be carefully evaluated before making an Investment in the Companies.
16. There are special risks associated with investing in Frontier and Emerging Market Entities or FEMEs. As a result, a loss of an Investor's entire Investment is possible. All prospective investors are urged to review carefully and consider the following.
FRONTIER AND EMERGING MARKETS RISKS
17. General Business Risk. In general, financial and operating risks confronting developmental-stage companies, as well as more mature expansion-stage companies are significant.
a. Many frontier and emerging market enterprises "FEMEs" go out of business every year. It is difficult to know how companies will grow or develop, if at all, or what changes may occur in the market as it develops.
b. Early-stage and development-stage enterprises often experience unexpected problems in the areas of product development, manufacturing, marketing, financing and general management, which, in some cases, cannot be adequately solved. In frontier and emerging markets, such companies may require substantial amounts of financing which may not be available through institutional private placements or the public markets.
18. Quality and/or Lack of Information. Holders of frontier and emerging market investments generally have access to less reliable and/or less detailed information, including both general economic data and information concerning the operations, financial results, capitalisation and financial obligations, earning and securities of specific enterprises.
19. Investment in frontier and emerging market countries. FEME Investments involve risk factors and special considerations, including the following, which may not be typically associated with investing in more developed markets. Political or economic change and instability may be more likely to occur and have a greater effect on the economies and markets of the frontier and emerging market countries. Adverse government policies, taxation, restrictions on foreign investment and on currency convertibility and repatriation, currency fluctuations and other developments in the laws and regulations of the countries in which investments may be made, including expropriation, nationalisation or other confiscation could result in loss to the Investment. By comparison with more developed securities markets, most frontier and emerging markets are comparatively small, less liquid and more volatile. In addition, settlement, clearing and registration procedures may be under-developed, enhancing the risks of error, fraud or default. Furthermore, the legal infrastructure and accounting, auditing and reporting standards in certain frontier and emerging market countries may not provide the same degree of investor information or protection as would generally apply to more developed markets.
20. Political Risks. Some regions in frontier and emerging market countries are currently undergoing uprisings and unrest. Investments may be subject to changing political environments, regulatory restrictions and changes in government institutions and policies, any of which could adversely affect private investments.
a. Actions in the future of one or more of the governments of the markets in which the Investment invests could have a significant effect on the various economies of those markets, which could affect market conditions, prices and yields of securities in the Investment's portfolio. Political and economic instability in any of the regions in which the Investment invests could adversely affect its investments.
b. In certain markets, any economic reforms enacted that lead to a more open market and encourage foreign investment may be curtailed or stalled by political opposition. Political opposition could lead to restrictions on foreign direct investment, including limitations on investment returns, and such restrictions could have an adverse effect on the investments.
c. Many frontier and emerging market countries have undergone a substantial political and social transformation from centrally controlled socialist systems to the early stages of a market oriented democracy.
d. There can be no assurance that the economic, educational and political reforms necessary to complete political and economic transformation will continue. The state of development of many political systems in the continent makes them susceptible to changes and potential weakening from economic hardship, popular dissatisfaction with privatisation efforts and social or ethnic instability.
e. Popular dissatisfaction with recent economic and social dislocations resulting in part from the rapid pace of privatisation may lead to revisions or rejection of current laws and policies favouring economic reform. There can be no assurance that economic reform will continue or, if continued, will proceed at the same pace.
f. Civil unrest, ethnic conflict or regional hostilities may contribute to instability in some countries of the continent. Coups d'état may occur or civil wars may break out. Such instability may impede business activity and adversely affect the environment for foreign investments, thereby having a material adverse impact on the Investment.
g. Political reform among countries of the continent has not proceeded at a consistent pace or reached significant depth. Many countries and their infrastructure sectors are still administered by government officials and members of local bureaucracies that oppose political and economic liberalisation, which could pose additional risks to the Investment.
21. Economic Risks. Businesses in certain frontier and emerging market countries have only a very recent history of operating within a market¬ oriented economy. In general, relative to companies operating in more developed economies, companies operating in frontier and emerging market countries can be characterised by a lack of:
a. experienced management;
b. modern technology; and
c. a sufficient capital base with which to develop and expand their operations.
It is unclear what will be the effect, if any, on companies in these countries, of attempts to move towards a more market-oriented economy. In many frontier & emerging market countries, the extent of the success of economic reform is difficult to evaluate. In several countries, large sections of the workforce remain underemployed or unemployed. Continued unemployment could hinder the ability of various governments to keep deficit spending in check.
22. Inflation. Some frontier and emerging market countries have experienced substantial rates of inflation in recent years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain economies. Inflation rates have decreased dramatically, but remain high compared to more developed economies.
23. Government Influence on Economy. Governments of some frontier and emerging market countries have exercised and continue to exercise substantial influence over many aspects of the private sector. Accordingly, government actions in the future could have a significant effect on economic activities in such countries, which could affect the value of private sector investments. Expropriation, confiscatory taxation, nationalisation, war, rebellion, political or social instability or other political developments could adversely affect the assets of the Investment.
24. The Banking System. In addition to being under-developed, the banking system in frontier and emerging market countries is subject to two main risks: (i) the insolvency of a bank due to concentrated debtor risk; and (ii) the effect of inefficiency and fraud in bank transfers and custody.
25. Custody Risk. Custody services in certain frontier and emerging market countries remain undeveloped and, consequently, there is transaction and custody risk in dealing in frontier and emerging market Investments.
26. Possible Business Failures. The insolvency or other business failure of any one or more of the underlying investments could have an adverse effect on the Investment's performance and ability to achieve its objectives. The lack of generally available financing alternatives for companies doing business in frontier and emerging market countries increases the risk of business failure.
27. Difficulties in Protecting and Enforcing Rights. In certain frontier and emerging market countries local courts may lack experience in commercial dispute resolution and many of the procedural remedies for enforcement and protection of legal rights typically found in more developed jurisdictions are not, as yet, available. There remains uncertainty as to the extent to which local parties and entities, including local governmental agencies will recognise the contractual and other rights of the parties with which they deal. There can be no assurance that this difficulty in protecting and enforcing rights in these countries will not have a material adverse effect on the Investment and its operations.
28. Uncertain Legal and Regulatory Environment in Frontier and Emerging Markets. The law and regulations affecting foreign investment and business in frontier and emerging market countries continue to evolve in an unpredictable manner.
a. Most frontier and emerging market countries have legal systems that may not be capable of providing significant protection to investors. Laws and regulations, particularly those involving taxation, currency regulation, foreign investment and trade and transfer of title to securities and other property are relatively new and can change quickly and unpredictably.
b. Although basic commercial laws are in place, they are often unclear and untested and subject to varying interpretation, and may at any time be amended, modified, repealed or replaced in a manner averse to the interests of the Investment, whereby causing repatriation risk.
c. Broad discretion and sometimes lack of appropriate training on the part of government authorities implementing the laws may produce additional legal risk. There can be no assurance that the regulatory environment in which the Investment will be operating will become stable in the future. The burden of complying with conflicting or onerous laws, or difficulties in clarifying or enforcing rights, may have a material adverse impact on the operations of the Investment.
29. Crime and Corruption. The frontier and emerging markets may be affected by corruption and organised crime and many businesses are potential victims of theft and extortion. Property and employees of the Companies and their portfolio entities may be targeted as potential victims of theft, violence or extortion. Threats or incidents of crime may cause or force the Investment to cease or alter certain activities or liquidate certain investments, which may cause losses or otherwise have a material adverse effect on the Investment. Moreover, in most countries in the continent, there have historically existed ties between government, agencies or officials and private economic sectors that have resulted and could in the future result in preferential treatment, inefficient resource allocation, arbitrary decisions and other practices or policies that could have a material and adverse effect on the Investment.
RISKS ASSOCIATED WITH THE OPERATIONS OF THE COMPANIES
30. Refinancing Risk: The FEMEs may be subject to the risk that over the longer term they may be unable to generate sufficient cash flow to make scheduled payments on their debt, or may be unable to obtain sufficient funding to satisfy obligations to service or refinance their debt. A failure to make scheduled payments or otherwise satisfy obligations under financing arrangements could result in indebtedness being accelerated. The ability to make payments on, and to refinance debt and to fund future operations and capital expenditures will depend on future operating performance and ability to generate sufficient cash. This depends, to some extent, on general economic, financial, competitive, market, legislative, and/or regulatory factors, which are beyond the FEMEs' control.
31. Net Value of Investment. The net value of an investor's investment in the Companies may be significantly less than the amount of such investor's funded Commitment for a significant period of time following closing. This is primarily a result of (i) the impact of fees and expenses and (ii) the likelihood that poorly performing investments made by the Investment will be written down in value prior to any successful investments being realised. The negative effect of fees and expenses in the period following closing is further increased as the fees charged by the Investment are calculated on the basis of the aggregate amount of the commitments in the Investment rather than on the basis of the draw down commitments in the Investment. As a result, the Investment is expected to initially show a negative return. This position will be translated to investors in the Companies.
32. Foreign Tax Legislation. Although the tax legislation of many countries is aligned through the OECD guidelines these can be interpreted in various ways and consequently tax authorities may adopt a different approach to that of the UK. Other material differences may also arise in the way in which remittances are treated and withholding tax is deducted at source. Whilst larger corporations can manage these differences smaller companies cannot and this can give rise to tax inefficiencies that result in the Company paying a higher rate of corporation tax than would be the case if all their operations were based in the UK.
33. Enterprise Initiative Schemes (EIS). EIS are high-risk investments and may only be suitable as medium or long-term investments in part of a diversified investment portfolio for wealthier investors. In respect of approved schemes, approval, which is given by the Board of Inland Revenue, does not guarantee the safety or success of the investment. It simply means that the company satisfies certain administrative criteria and where these criteria fail to be me the approval will be invalidated. Tax relief will not be available or may be withdrawn if the Company, or an individual investor, does not comply with the EIS regulations during the relevant period and tax relief already given will have to be repaid.
34. Individual Investor's circumstances. The amount of any tax relief an Investor may gain from an Investment through the Companies depends on the Investor's individual circumstances. Investors are strongly advised to seek professional advice in relation to the taxation implications of their Investment in the Companies.
35. Tax Advantages and legislation may change. Potential Investors should be aware that any Tax Advantages currently available might change in future. The EIS FAQ’s (click here) and EIS Tax Advantages document (click here) are both based on the understanding of the existing law and HMRC practice as at the date of this document. Future changes to the tax legislation may adversely affect the performance of the Companies and the return to the Investor. The EIS scheme itself may also be subject to revision.