Originally published Summer 2004

The Treasury is proposing changes which may make it easier for companies to raise funding from high net worth individuals and so-called "sophisticated investors".

Any company seeking investment normally has to provide information to prospective investors about its business, assets and liabilities, usually in the form of a business plan or investment memorandum.

This exercise is likely to constitute "financial promotion" under the Financial Services and Markets Act 2000 ("FSMA"), which prohibits a company from inviting or inducing third parties to engage in investment activity unless the company is an "authorised person" under FSMA (usually an investment bank, broker or financial adviser) or the content of the business plan has been formally approved by an authorised person.

FSMA contains certain exceptions which permit the company to provide investment information to "high net worth individuals" and "sophisticated investors". To qualify as a high net worth individual, a person must have a certificate from their employer or accountant stating that they either earn at least £100,000 or have net assets worth at least £250,000 (excluding their residential home and certain other assets). An individual can qualify as a sophisticated investor if an authorised person has certified that the individual has sufficient knowledge to understand the risks associated with the investment. In each case, the company must be provided with copies of the relevant certificates before it can provide the information to the prospective investor.

Proposals

The Treasury is carrying out a two-year review of FSMA and is proposing to:-

  • allow financial promotion where the company reasonably believes that the investor is a high net worth individual or sophisticated investor; and
  • introduce a system involving one of three alternatives: (a) high net worth individuals will be allowed to certify their own status, but sophisticated investors will still require third party certificates; (b) self-certification will be available to all high net worth individuals and to sophisticated investors who satisfy certain criteria; or (c) both high net worth investors and sophisticated investors will be able to certify their own status in all cases.

It is proposed that self-certification will only be available for investments where the investor cannot lose more money than he or she invested.

Comment

The proposed changes should make it easier and quicker for companies to raise funds from individuals, avoiding the need to obtain documentation from third parties, which can delay the process. However, an investor will still be required to sign appropriate certificates and provide a statement enabling them to receive the financial promotion.

In addition, the proposals only apply to unlisted securities (and related investments). It is conceivable that they may be extended to investments in listed securities, which are in some ways less risky, given the strict requirements which already apply to listed companies - for example, regarding the information which must be provided to investors and regulatory authorities.

Until the proposals become law, companies seeking funding must continue to comply with the guidelines set out in FSMA.

© RadcliffesLeBrasseur

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