Financial Promotions by Unlisted Businesses
The Government has widened the financial promotion regime from 3 March 2005. Generally, a company wishing to raise finance must have its promotional material approved by a person authorised under Financial Services and Markets Act 2000. There is an exemption for promotions to high net worth individuals or sophisticated investors but, previously, the company was required to know that the individual has been certified as such by an authorised third party. This regime was time-consuming, costly and inconvenient, and, it seems was used infrequently.
Changes have been made to allow investors to self-certify themselves as high net worth individuals or sophisticated investors and to allow firms to promote to individuals that they "reasonably believe" are self-certified as high net worth or sophisticated. Promotions to self-certified high net worth or sophisticated investors are limited to investments in unlisted equity and health warnings must be attached.
The Financial Promotions Regime
The Financial Services and Markets Act 2000 ("FSMA") restricts people (including companies) who are not authorised under the FSMA, to invite or induce people to engage in investment activity. This includes offers to buy or sell shares and is known as financial promotion.
It is not lawful to engage in financial promotion unless the financial promotion has been approved by a person authorised under the FSMA or the financial promotion falls under one of the exemptions in the Financial Promotions Order 2001 ("FPO").
Two of these exemptions are financial promotions to high net worth individuals and to sophisticated investors. These exemptions allow unlisted businesses to raise equity capital informally from experienced and wealthy investors without the significant cost of obtaining the approval of an authorised person to the content of the financial promotion.
However, under the previous law, a financial promotion could only be made to a high net worth individual if their employer or their accountant has certified that they earned at least £100,000 or had net assets worth at least £250,000 (excluding their primary residence). A financial promotion could only be made to a sophisticated investor if an authorised person had certified that such investor has the requisite knowledge to understand the risks involved with such investment.
Concerns were raised that the exemptions had not encouraged very high levels of certification from either high net worth individuals or sophisticated investors and that this was preventing smaller companies raising capital via unlisted equity.
Changes
The Government has therefore made changes to the current regime in relation to unlisted equity.
First, as of 3 March 2005 high net worth individuals can now self certify if they earn at least £100,000 or have net assets worth at least £250,000 (excluding primary residence, life assurance policies and pension). It is now possible to communicate a ‘non-real time’ or ‘solicited real time’ unapproved promotion to an individual whom the person making the communication believes on reasonable grounds to be a certified high net worth individual if a number of conditions are met.
Second, sophisticated investors can now self certify if they:
1. are a member of a network or syndicate of business angels for at least 6 months;
2. have made more than one investment in unlisted companies in the previous 2 years;
3. are working, or have worked in the previous 2 years, in a professional capacity in the private equity sector, or in the provision of finance for small and medium sized enterprises; or
4. are currently, or have been in the previous 2 years, a director of a company with an annual turnover of at least £1 million.
It is therefore possible to communicate an unapproved promotion to an individual whom the person making the communication believes on reasonable grounds to be a self-certified sophisticated investor provided a number of conditions are met.
Promotions to self-certified high net worth or sophisticated investors will be limited to investments in unlisted equity.
Third, people will be able to make financial promotions to individuals that they "reasonably believe" are certified as high net worth individuals or sophisticated investors. The promoter should request a signed statement from a potential investor that they are certified as high net worth individuals or sophisticated investors. It may be sufficient for an individual to demonstrate that they have taken sufficient steps (including oral confirmations from the potential investor) to form a reasonable belief that a signed statement exists. However this would be a matter for the Courts to determine.
Unapproved financial promotions made to such investors will need to be accompanied by health warnings which will be in a prescribed form so they will appear prominently at the beginning of all promotions.
The law in this area is complex and specific advice should be sought in all cases.
