The latest twist in the subinvestment-grade debt market is the introduction of the so-called “burrito bond” this past June.

Cooked up by Chilango, a Mexican restaurant in London, U.K., the burrito bond is a version of “crowdlending,” a twist on crowdfunding in which prospectuses and disclosures are dispensed with in deals usually offered to potential investors directly via the web. This method of funding is democratic and dangerous – and it’s on its way to Canada.

The Chilango burrito bond, a four-year promissory note, has a £500 minimum investment with an 8% annual coupon. But for £1,000, bondholders also get a free burrito every week for the lifetime of the debt.

The downside is that there’s neither a secondary market for the notes nor recourse in the event of non-payment of interest, principal or, for that matter, burritos.

Tracking in this unregulated market is sketchy. Yet, small companies can borrow without the cost and complexities of securities laws designed to protect investors and to define how conventional bond loans should be done.

The 8% cash interest payment is £80 a year on the £1,000 note, or £320 over four years. The weekly free burrito boosts the return. During the four-year term, a bondholder would get 208 free burritos. Each burrito costs £6; that’s £1,248 worth of burritos. Add the £320 cash interest and the total return on the investment would be £1,568 – or 157% of an interest-equivalent return.

In contrast, the Bank of England currently offers 1.5% on its five-year gilts. On a £1,000 note, that would buy you two and half burritos a year. Not surprising, the burrito bond issue was heavily oversubscribed, given the current climate of low interest rates that provide insufficient income.

Even without the nosh, the Chilango bond would find takers, says James Hymas, president of Hymas Investment Management Inc. in Toronto, “especially when you offer 8% on a bond.”

Nobody is suggesting that pension funds are ready for such debt, but the concept of a debt instrument sold on the back of a menu transforms selling debt to the public. Without offering documents that accompany conventional bonds, Chilango’s deal requires an investor to ferret out financial data on the business and background information on the principals behind the business to understand the industry, and more.

Chilango promises return of principal at the end of the four-year term, but the deal is not secured by any property or other assets that bondholders can seize if they’re not paid. As well, the bonds are not transferable – and the issuer has the right to buy back the notes at its pleasure. So, if Chilango earns hefty profits, it can redeem the notes and abandon its bondholders.

But if Chilango cannot or will not buy back the notes or redeem them at maturity, bondholders lose. The bonds provide little recourse, as restaurants are usually just leaseholds, a sign or trademark, crockery and pots and pans.

There have been other Chilango-type deals. Hotel Chocolat UK issued a bond in 2010 that paid interest in its namesake product. Naked Wines, an online U.K. wine retailer, offered a mini-bond in September 2013 that pays 10% in wine or 7% cash. (That £1-million issue was oversubscribed.) These consumer-product deals are distinctive in that they’re offered in the course of the issuer’s business to customers, who then can evaluate the issuer at its place of business.

This niche concept is growing. Crowdcube Capital Ltd., a U.K.-based consultancy specializing in crowdfunding, estimates that there should be £8 billion worth of mini-bonds issued by 2017, up from about £1 million last year.

This concept of businesses doing their own debt financing is coming to Canada. It will require exemptions from securities regulations that impose disclosure and procedural rules, registration and accounting rules on issuers. To date, six provincial securities regulators have announced proposals for prospectus exemptions that would allow early-stage firms to raise up to $1.5 million online through the issue of securities.

Crowdlending will have to be compatible with securities laws in many jurisdictions, as anyone can log into a potential issuer’s website, says Christa Fairchild, director of marketing for Vrdana Inc., a Montreal-based maker of virtual reality headsets that is looking forward to the introduction of web-based crowdfunding in Canada.

“The problem is that to comply with securities laws in many jurisdictions, there would have to be a filtering process to ensure compliance,” she says. “That is at variance with the global nature of the web. But lending money directly to a restaurant or other business when you’re at its place of business reduces the problem of multi-jurisdictional compliance.”

Saskatchewan is pioneering a crowdfunding exemption that would allow investors to put $1,500 per deal into crowdfunding offerings. A small business may be able to use crowdfunding, including debt issues, to raise up to $300,000 per calendar year under the proposal. The legislative allowance for this informal debt offering is supported by the National Crowdfunding Association of Canada (NCFA).

The NCFA’s model for national rules would raise the limit to $2,500 per deal and up to $1.5 million per firm per 12-month period.

Provincial securities commissions are reviewing what offerings will be exempt from their rules, says Craig Asano, the NCFA’s executive director in Toronto: “Investment crowdfunding should be up and running in Canada in the first half of 2015.”

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