As any director will attest, securing financial investment can be one of the most challenging steps in building a successful company. It is also one of the most important – providing the vital capital needed to embark on key projects, expand the workforce, or attract new customers.
Whatever the size of your business or its growth stage, there are some essential legal requirements which all directors need to consider before engaging with new investors.
While many will be aware of the prohibitions on offering company shares to the public under the Companies Act 2006 and the Financial Conduct Authority’s (FCA) Prospectus Rules, companies must also be mindful of the restriction on financial promotions as set out in section 21 of the Financial Services and Markets Act 2000 (FSMA). This restriction covers not only share issues but various debt finance arrangements.
Failure to consider the law on financial promotions, designed to protect inexperienced investors from deficient or misleading pitches, could land you in hot water. Indeed, a person who makes a financial promotion in contravention of the restriction commits a criminal offence and is liable to a maximum prison sentence of two years. Additionally, any agreement entered into due to an unlawful financial promotion is likely to be unenforceable and could give rise to civil liabilities as well as negative publicity.
What is the restriction on financial promotions?
The restriction on financial promotions states that “a person must not, in the course of business, communicate an invitation or inducement to engage ininvestment activity” unless that communication has been made or approved by an FCA-authorised firm, or the communication is exempt under the Financial Promotions Order 2005 (FPO).
What constitutes a “financial promotion”?
In short, a “financial promotion” is made where:
- There is a “communication” (whether oral, written or electronic);
- The communication constitutes an invitation or inducement to engage in “investment activity” (including the offering of shares and various debt financing arrangements); and
- The communication is made “in the course of business” (meaning that genuinely non-commercial communications with friends or family members will not be caught).
Accordingly, there are a wide range of circumstances in which companies may make a financial promotion. Alongside the more obvious examples of promoting an investment, they can include:
- Posting a ‘pitch deck’ to social media featuring an invitation for followers to subscribe for company shares;
- Circulating a business plan to key contacts with the aim of soliciting secured loan finance; or
- Inviting a person to join a Limited Liability Partnership (LLP) investment vehicle, where that person will not have day-to-day control over the LLP’s property
Are there any exemptions?
Fortunately for those seeking investment, there are a number of exceptions to the restriction on financial promotions which may be available depending on the circumstances. Among the 70+ exemptions laid down in the FPO 2005, the most commonly relied upon cover situations involving communications to:
- “Investment professionals” (article 19) – including FCA authorised entities, such as banks;
- “Certified high net worth individuals” (article 48) – meaning individuals with an annual income of not less than £100,000, or net assets of not less than £250,000 and who have signed a statement acknowledging their loss of regulatory protection; and
- “Certified” and “self-certified sophisticated investors” (articles 50 and 50A) – covering individuals with significant investment experience who have either i) been certified by the FCA or ii) signed a statement acknowledging their loss of regulatory protection.
Additionally, there is a useful exemption for “one-off non-real time communications and solicited real time communications” (article 28), a safe harbour for communications which have been adequately tailored to the particular circumstances of a recipient, being either one person or a group of persons who are expected to jointly invest.
Moving forward with confidence
Each of the above exemptions are finely worded and supplemented by a wealth of guidance from the FCA in the form for the Perimeter Guidance Manual (PERG). Given the complexity of this regime, and the significant risks associated with falling foul of it, seeking legal advice is a must. We will be able to tell you when an exemption might apply and the procedure for taking advantage of it – or whether approval by an FCA authorised person, such as an accountancy firm, will be the appropriate route.
At Blaser Mills Law we regularly act for clients who are in the process of seeking investment and who need pragmatic, commercial advice on the way forward. If you are looking to grow your business and require help navigating a complex regulatory landscape, get in touch with us today on 01494 3814 2020 or at trhwcor@blasermills.co.uk.
This article is not intended to constitute legal advice and you should not take, or refrain from taking, any action based on the information which it contains. Always seek the services of a professional legal adviser.