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27th January 2022
Re: HMT Treasury Consultation. Financial promotion exemptions for high net worth individuals and sophisticated investors. December 2021
I welcome the opportunity to respond to the questions raised by the above consultation, to which my answers are as follows:
2. Yes and yes.
3-8 The promotion of investment opportunities in unregulated investments to private individuals should be restricted to investors who are not easily convinced or susceptible to marketing ploys and who are also wealthy.
Young educated professionals who are savvy high earners in their early 30’s but with a mortgage and a young family who have not yet accumulated surplus net assets should be eligible to receive promotions of unregulated investments.
Wealth alone does not imply sophistication though a lack of wealth might indicate that a private investor is not as sophisticated as he might like to declare.
The pivot for deciding what is and is not an appropriate market for the promotion of an unregulated investment to a potential investor should be that a promoter or issuer must have reasonable grounds for believing that the potential investor is likely to consider all circumstances and possible consequences of a decision to invest or not; in other words, that he will be circumspect and thus unwilling to take risks he doesn’t understand.
The characteristic of being “circumspect” would be a more targeted criteria of the sort of private investor for whom an exemption should be made, rather than the criteria of being sophisticated.
I would therefore recommend that the current exemptions for sophisticated and high net worth investors should be merged in to a single exemption: that of the circumspect high net worth investor.
I appreciate that the critieria for declaring oneself as a sophisticated investor is extended well beyond the Oxford English dictionary definition of what it means to be sophisticated but the current criteria includes two very weak indicators of circumspection and two other categories which too narrowly define who should be regarded as amongst the sophisticated members of our society for these purposes:
What is missing from this list is a category that also includes all the doctors, dentists, architects, politicians, IT specialists and other professionals in our society who have evidenced their wit by having attained a higher education qualification and who for a period of two consecutive years have also earned an annual gross income above £100,000 within the previous ten years.
This list, as so amended, would exclude many wealthy footballers, widows and those long retired; and rightly so.
A better test would be, as I suggest, to combine the requirement for having reasonable grounds for believing a potential investor is sophisticated, or, more aptly, circumspect, with the current test for being of high net worth. The test of high net worth status already includes individuals who have earned £100,000 in the previous year but it would be a more progessive solution to couple this high earning criteria with a combined requirement to have achieved a higher education qualification.
Merely increasing this limit from £100,000 to £175,000 would do nothing to filter out first division footballers (wealthy widows or those long retired etc) with more money than sense and would only serve to keep out of the exemption the bright junior associates who earn above £100,000 but who have not yet bridged £175,000 per annum.
9-11 The law currently already requires that the financial promotion restriction does not apply to any communication where the person making the communication believes on reasonable grounds that it will be made to a self-certified or high net worth investor.
A requirement that those making a communication should have such reasonable grounds before a promotion is made which is subsequently verified by the completion by a self certified statement is a good test.
If a statement cannot be completed, then the belief on reasonable grounds might be called into question.
Requiring a promoter or issuer to keep a record of investors to whom a promotion is made and of those investors who were not subsequently able to provide a certificate would, if the volume of investors unable to provide a certifcate were significant, point to a lack of common sense or the adoption of a capricious approach by the communicator as to their assessment as to what were reasonable grounds for their belief when making their communication.
I would not recommed that HMT go beyond this and require that communicators undertake secondary verification on who is or is not sophisticated and/or wealthy as this would be an unweildy clog and fetter on the ability of small companies to raise capital as well as expensive and difficult to oversee.
Commonsense is a good enough yardstick without trying to define what it means in every circumstance, provided a good record is made of what decisions were taken and what happened subsequently.
Whether common sense was applied or a capricious approach taken can then be judged with the benefit of hindsight rather than by reference to yet another a tick boxing show of verification.
12. We do not personally use the excemptions but if were were to do so then my starting point would be to eliminate all those whom one believes on reasonable grounds are unlikely to have both attained a higher education qualification and who are unlikley to have satisified a period of two consecutive years where they have earned an annual gross income above £100,000 within the previous ten years. My personal ‘ linked in’ network would be a good guide as to who would be eligible to receive financial promotions.
14-20 See above.
21. Not applicable.
I hope these comments are of assistance. They are my own and not necessarily representative of all other views in the firm.
RW Blears LLP