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Updates to Financial Promotion Exemptions: Key changes to consider when fundraising

Posted on 21 December 2023

Earlier this year, HM Treasury confirmed that significant reforms and updates were to be made to the financial promotion regime in the UK. In particular, companies planning capital raisings, as well as angel investors, should note the changes, which are expected to come into force at the end of January 2024.

The Financial Conduct Authority (the FCA) is responsible for the regulation and supervision of financial promotions, which includes marketing fundraising opportunities to potential investors. Pursuant to section 21 of the Financial Services Markets Act 2000 (FMSA), a person must not communicate a financial promotion, unless it has been issued or approved by an FCA authorised person, or otherwise falls within scope of an exemption. Exemptions are set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the FPO).

On 7 November 2023, HM Treasury published its response to its earlier consultation into the UK's financial promotions regime (the Response), which focused on reforming certain key exemptions.  This note focuses on the following exemptions, which are typically relied upon in the context of fundraising activities:

  • Regulation 48 of the FPO: Certified High Net Worth Individuals; and
  • Regulation 50A of the FPO: Self-Certified Sophisticated Investors.

We summarise the key changes below.

High net worth individuals

In order to meet the financial thresholds to qualify for the high-net-worth individuals' exemption, a potential investor must have (i) received £100,000 of income in the previous year, or (ii) held net assets of £250,000 throughout the last financial year. HM Treasury are now increasing these thresholds to:

  • income of at least £170,000 in the last financial year; or
  • net assets of at least £430,000 throughout the last financial year.

The changes reflect an increase to the thresholds in line with inflation balanced against the Government's recognition of the importance of angel investment to the economy.

Further, the description of certified high net worth individuals is now outdated as investors no longer must be certified by a third party to use this exemption, so 'certified' is being removed from the title.

Self-certified sophisticated investor criteria

The Government intends to strengthen the criteria for the self-certified sophisticated investor exemption by removing the requirement for individuals who have made an investment in an unlisted company, in the previous two years, to rely on this as an indicator of sophistication. This reflects the rise in online investing; it is much easier for individuals to invest in unlisted companies than it was in 2005 when the exemption was last revisited.

The threshold to satisfy the 'company director' criterion is also being increased. Instead of being a director of a company with an annual turnover threshold of £1million, now the individual concerned must be a director of a company with at least an annual turnover of £1.6 million. Again, this increase is in line with inflation. The Government has said that it considers being a director of a company with £1.6 million annual revenue a sufficiently high bar to demonstrate business success and would exclude less experienced directors.

The Government considered suggested amendments to the other two existing criteria of self-certified sophisticated investors but decided to leave these unchanged.

Investor Statements

The Response reported that, prior its publication, some investors did not engage with the information presented to them when engaging with financial promotions, leading some investors to incorrectly certify themselves. To achieve greater engagement from investors and higher awareness of the regulatory protections they may lose by receiving financial promotions under the exemptions, the investor statements have been updated, both in terms of format and simplified language. The Government has made the conditions to be considered a high net worth or sophisticated investor more prominent by bringing these to the top of the statement. They have also removed reference to other pieces of financial services legislation and provided more consumer-friendly explanations, to ensure the statements hold the attention of the investors more effectively.

Company details

The Government is also implementing new requirements for companies to provide details about themselves in all communications made relying on these exemptions, including the company address, contact information and the company's registration details. The aim is to assist prospective investors to undertake basic due diligence on the person marketing the investments.

Next steps

The changes set out in the Response will be implemented through secondary legislation intended to come into force on 31 January 2024. The Government considers that no transitional regime is required.

While Article 14 of the FPO does allow for follow up financial promotions in certain circumstances (which would permit continued reliance on an exemption under the existing regime), in all other cases new financial promotions made from 31 January 2024 onwards, will need to be made in accordance with the new exemptions set out above.

If you need guidance on the new exemptions, including how they may apply to fundraisings that are already underway, please do not hesitate to contact us to discuss further.

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