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Who is this guide for?

This guide is intended for UK small and medium-sized enterprises (SMEs) when examining their options and responsibilities when it comes to raising money from investors.

Essentially all SMEs will, at some point, wish to raise outside investment and it is important that when promoting their business to potential investors – be they individuals, corporates or funds – they adhere to the UK’s regulatory regime which governs the making of “financial promotions”.

The guidance provided herein is high level and non-exhaustive and a specific list of topics which are not covered (and on which you may wish to seek further guidance) is set out at the end of the note.

What is a financial promotion?

A financial promotion is any communication that either invites or induces a person to engage in investment activity that is communicated in the course of a business.

Financial promotions can take many forms, including information posted on websites or shared on social media channels, pitch events, statements made in meetings, or in online videos or via email, so you should err on the side of caution.

Perhaps the most classic example of a financial promotion is an Offer Document (sometimes called an ‘Information Memorandum’, ‘Investment Memorandum’ or ‘Pitch Deck’) which describes a business in the context of that business seeking to raise fresh capital from investors.

Looking briefly at the highlighted words in the definition in a bit more detail:

“invite” is relatively clear, meaning asking someone, or explicitly offering them the opportunity, to invest (1)

“induce” is more complicated, and would typically exclude purely factual communications and require some sort of persuasive/promotional element (2)

“investment activity” is broadly defined and would, for example include an investment in shares or debt issued by an SME

“course of business” requires a commercial interest, but essentially operates to exclude ‘friends chatting in the pub’ from falling within the regulatory regime.

So is everything that might describe my company in positive terms going to be caught by this?

If you are an unlisted SME and not currently fundraising, a ‘good news’ story on your website about a recent win for your business will not be a financial promotion simply because it shows your company in a positive light.

Similarly, ‘capacity’ information which simply gives an overview of your business, team and experience would be considered too general in nature so long as it does not include reference to any specific opportunity.

During any fundraising period however (including in the run up to such a period), care should be taken that any communications you make about the company either (i) fall short of being a financial promotion, based on the definition above or (ii) are a compliant financial promotion (being either approved or exempt) as described in the remainder of this guide.

How are financial promotions restricted?

Under UK law, there is general prohibition on the communication of financial promotions unless they are either:

• issued or approved by a firm which is authorised by the Financial Conduct Authority (“FCA”); or

• permitted thanks to an exemption (provided the terms of that exemption are adhered to).

This guide is focused on the latter category, but we will first briefly discuss the former.

Financial promotions approved by third party FCA-authorised firms

It is open to SMEs to approach an FCA-authorised firm (3) with a view to having them approve the SME’s financial promotions. You may hear this described as a “section 21” approval (4)

There are advantages to having a promotion approved rather than relying on an exemption. Approved promotions can potentially be more widely disseminated to ordinary investors (e.g. in a crowdfunding campaign) than is permitted by any exemption. Additional comfort might also be taken by potential investors from a third-party approval granted by a regulated firm.

There are also disadvantages: the FCA-authorised firm’s approval will come at a cost, the contents of the promotion may be more restricted and extensive additional regulatory considerations and processes, including greater frictions in the investor application process, are brought into play.

Perhaps most importantly, for SMEs who are content to raise privately from angel investors, syndicates and funds, an approval is unlikely to be necessary and the disadvantages are likely to outweigh the advantages in most cases.

It is important to note, however, that if you don’t have your financial promotions approved by an FCA authorised firm, you will need to ensure your dissemination of those promotions is carefully restricted. You will not be able to simply publish them on your website for instance, at least not without putting in place firewalls, or post them on social media where they can be accessed by the world at large.

So which exemptions are likely to be most relevant to a fundraising SME?

The most common categories of potentially exempt individual recipients of a financial promotion are:

• high net worth individuals (“HNWI”)
• sophisticated investors (“SI”)
• investment professionals.

Persons who fall into these categories can receive invitations or inducements to engage in investment activity without such promotions requiring the prior approval of an FCA-authorised firm – subject to those promotions containing certain specific wording described below.

Making use of these exemptions is popular with companies looking to promote themselves to angel investors and investment funds with incurring disproportionate cost and the regulatory burden when seeking prior approval of their promotions from an FCA-authorised firm.

There are other, less commonly used, exemptions described briefly under the Other Information heading at the end of this note.

How do I compliantly make use of, in particular, the HNWI and SI exemptions?

In order for these exemptions to apply, the following are required:

• you must ensure that a validly completed and signed investor statement has been obtained from the recipient who you intend to communicate the unapproved financial promotion to (in reliance on either one of these two exemptions) (5);

• you must ensure that a prescribed risk warning and explanatory note precedes the promotion in the manner summarised in the Appendix to this guide.

Template forms of the latest investor statements are also contained in the Appendix to this guide.

What about the “investment professionals” exemption?

As you might imagine, the financial promotion regime is light touch when it comes to communicators to experienced, professional investors such as fund managers.

All that is required if you are an SME wishing to send your investor pitch deck to a well-known venture capital fund manager, for instance, is that you have a reasonable belief that the recipient is indeed an FCA authorised firm (or otherwise someone whose ordinary business is SME investing) with professional experience in matters relating to investments and that the communication indicates that it is only targeted at, and may only be relied upon by and the investment opportunity participated in by, such persons (in addition to other exempt categories of person). The template wording in the Appendix to this guide caters for this (please download the PDF version if reading via the website).

It should be noted that the regulations required that there are “proper systems and procedures” in place to prevent non-eligible recipients making investments. So as a fundraising company, you should ensure that you check, before any investment round is completed, that all the investors are either investment professionals or have provided signed investors statements confirming their HWNI or SI status.

What about the remaining content of the promotion?

The Financial Promotion Order 2005, which requires the above-mentioned risk warning and explanatory note to be included, does not further prescribe that you need to include (or exclude) any particular information in your unapproved promotions.

That does not mean that you can be cavalier as to what you say about your company.

If someone invests in your company on the strength of claims made in your Pitch Deck for instance, even if this contains the necessary risk warning and other regulatory wording, they might still be able to bring civil proceedings against you if the claims turn out to be unsubstantiated or false and they end up losing money. In more serious cases, you open yourself up to criminal liability if the claims are fraudulent.

It is worth bearing in mind the FCA’s overarching standard for financial promotions which applies to those promotions approved by authorised firms – that they must be “fair, clear and not misleading”.

I’m familiar with the HNWI and SI financial promotion exemptions but I’ve heard these have recently been changed. What’s the current position?

The previous eligibility thresholds for each exemption have been reinstated (see appended templates to this guide). The changes to be reversed can be summarised as:

(a) reducing the financial thresholds to be eligible for the HNWI exemption to:

(i) income of at least £100,000 in the last financial year; or

(ii) net assets of at least £250,000 throughout the last financial year; and

(b) amending the criteria to be eligible for the self-certified sophisticated investor exemption by:

(i) reinstating the criterion of having made two or more investments in an unlisted company in the previous two years; and

(ii) reducing the company turnover required to satisfy the “company director” criterion to £1 million (i.e. individuals who have been directors of companies with at least £1 million turnover in the last two years will remain eligible for the self-certified sophisticated investor exemption).

The updated format of the investor statements has been retained and continues to require individuals to interact with the relevant statement by selecting which condition(s) apply to them and providing some basic information before signing.

Any communication which relies on the two exemptions must also include (e.g. in footer text) the communicator’s address, company registration number and contact information (where the communicator is a business or incorporated association) so that recipients can perform basic due diligence on the communicator if needed.

Any investor statements which were signed before 26 March 2024 in compliance with the January 2024 changes will remain valid until (and including) 30 January 2025.

What does this guide not cover and what else should I be aware of?

As a general point, this guide is not intended to replace legal advice that is tailored to your particular situation. There will be other issues you might need to seek assistance with.

By way of a brief summary of some other points of note:

• There is a parallel financial promotion restriction and exemption scheme where the investment in question is a “collective investment scheme” rather than a more typical equity investment.

• There are other potentially relevant exemptions in the Financial Promotion Order including but not limited to communications (i) to existing members or creditors of the company making the promotion (ii) made within a company’s annual accounts (iii) made to high-net-worth companies and unincorporated associations (iv) made during a sale or takeover process (v) made in an approved prospectus.

Each of these come with their own stipulations and nuances and professional guidance should be sought before relying on these.

• Generally speaking, where one is making use of the exemptions in the Financial Promotion Order, it is not advisable to import concepts and wording from the world of the FCA Handbook which governs approved promotions. While often well-meaning, this can create confusion and give false impressions.

Examples include using the FCA’s prescribed risk warnings for approved promotions but in the context of an unapproved promotion or referring to your abiding by “FCA rules”. Do remember that the Financial Promotion Order is national legislation which applies to everyone in the UK whereas the FCA Rules only apply to firms authorised and regulated by the FCA.

Investor appropriateness assessments also form part of the FCA rules and are not required in the context of unapproved promotions. If you wish to use a version of an appropriateness assessment for investors in the name of best practice, that is fine provided care is taken and advice is sought to ensure there is no confusion as to the regulatory position.

This guide does not constitute legal advice and is non-exhaustive and summary in nature. If you are in any doubt as to a specific scenario, then feel free to contact us on [email protected] and we would be happy to assist.

_______________

(1) An example of an invitation might be: “Invest in XYZ Ltd’s share now by completing an application form”.
(2) An example of an inducement might be: “XYZ Ltd’s growth to date has been meteoric and that growth is all set to continue”
(3) As of 7 February 2024, only FCA authorised firms which have applied to the FCA for permission to act as an approver of financial promotions will be permitted to continue to approve promotions (pursuant to a parallel set of changes being implemented by the FCA).
(4) This refers to section 21 of the Financial Services and Markets Act 2000 which contains the financial promotion general restriction.
(5) The technical requirement of the Financial Promotion Order is that the communicator has a “reasonable belief” that the recipient has completed the relevant investor statement within the last 12 months. However, we would recommend that the safest way to obtain that belief is to request that they sign the statement afresh (or produce a recently signed statement) before the financial promotion is communicated to them.

Frank Daly

0208 159 2503

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