Update: in the Spring Budget 2024 the Chancellor reversed some of the changes we outline in this article. For the impact of this decision, please see our latest article. This article was originally published on 21 December 2023, and updated on 22 February 2024.
Significant reforms and updates were made to the financial promotion regime in the UK with effect from 31 January 2024. These changes will be particularly relevant to companies planning capital raisings, as well as to angel investors.
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: High Net Worth Individuals; and
- Regulation 50A of the FPO: Self-Certified Sophisticated Investors.
We summarise the key changes below.
High net worth individuals
Historically, 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. These thresholds have now been increased 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 the Government's desire to uprate the previous thresholds in line with inflation, balanced against the Government's recognition of the importance of angel investment to the economy.
Further, it was felt that the description of the exemption as relating to "certified" high net worth individuals was outdated as investors no longer need to be certified by a third party to use this exemption, so 'certified' has been removed from the title.
Self-certified sophisticated investor criteria
To strengthen the criteria for the self-certified sophisticated investor exemption, individuals are no longer able to rely on having made an investment in an unlisted company, in the previous two years, 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 has also been 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 investors did not always properly understand 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 prescribed form 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
New requirements have been imposed on companies seeking investment 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.
Implementation
The proposed changes set out in the Response were implemented through secondary legislation which came into force on 31 January 2024. No transitional regime was implemented.
While the legislation does allow for follow up financial promotions in certain circumstances (which would permit continued reliance on an exemption engaged under the previous 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 or in the future, please do not hesitate to contact us to discuss further.