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Regulatory - Which Investors Can You Approach for Investment and What Can You Say: A Brief Overview of the UK Financial Promotion Regime
What are Financial Promotions?
In the UK, any communication that represents an invitation or inducement to engage in investment activity constitutes a financial promotion. There are rules for such financial promotions to protect consumers who could be influenced by and rely on information from financial promotions.
Under the financial promotions regulations, a person must not make a financial promotion unless it is made or approved by a person authorised by the Financial Conduct Authority or the Prudential Regulation Authority or it is covered by an exemption. If an unauthorised person wants to make such communications, it must “believe on reasonable grounds” that the recipient falls within one of the prescribed exemption categories of investors. There are a number of categories of exempt persons, but the most frequently relied upon by companies raising money from business angels are High Net Worth Individuals (“HNWIs”) and Self-certified Sophisticated Investors (“SSIs”).
High Net Worth Individuals
An HNWI is a person who has completed and signed a statement within 12 months prior to the communication:
- confirming they had an annual income of £100,000 or more excluding any one-off pension withdrawals;
- confirming they had net assets of £250,000 or more, excluding their primary residence and any loan secured on it or any equity released from it, pension (or any pension withdrawals), or any rights under insurance contracts; and specifying their income (to the nearest £10,000) and/or net assets (to the nearest £100,000)
in each case for the immediately preceding financial year.
Self-certified Sophisticated Investors
An SSI is a person who has completed and signed a statement within 12 months prior to the communication that at least one of the following applies:
- the individual has worked in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises, in the last two years;
- the individual has been the director of a company with an annual turnover of at least £1 million, in the last two years;
- the individual has made two or more investments in an unlisted company, in the last two years;
- the individual has been a member of a network or syndicate of business angels for more than six months, and is still a member.
If you are in any doubt whether or not an individual has completed and signed an appropriate statement, then an investor statement in a prescribed form should be procured before you make any form of financial promotion.
“Black Box” Warning
Financial promotions may only be distributed to HNWIs and SSIs if the promotional materials contain a “black box” warning, with text as prescribed by legislation, and certain accompanying information at the beginning of the communication. While many do not want to “spoil” the cover of their promotional material, this is a legal requirement when relying on the HNWI and SSI exemption categories.
Where it is not reasonably practicable to provide this warning and information in a communication (such as an in-person pitch to prospective investors), the warning must be given orally at the beginning of the meeting and an indication that they will receive the warning in written form and that, before receipt of that warning, they should consider carefully any decision to engage in investment activity to which the communication relates. The warning and information must be sent to the recipient within two business days of the day on which the communication is made.
Additional Notice
In addition, financial promotions made under the exemptions must also be accompanied by a statement:
- that the communication is exempt from the financial promotion restriction on the grounds that it is made to an investor that meets the relevant exemption;
- of the requirements that must be met in order to qualify as either a HNWI or SSI; and
- that if the person is in any doubt about the investment, they should consult an authorised person specialised in advising on investments of the kind in question.
These above indications may take the form of a statement added to the financial promotion.
Transitional Provisions
Due to the change and subsequent reversal in thresholds for HNWIs and SSIs in early 2024, there are transitional arrangements to be aware of:
- From 31 January 2024 to 26 March 2024, the thresholds were increased, and as such where an individual has completed and signed an investor statement in accordance with the eligibility criteria in effect on those dates, that investor statement remains valid and has effect until and including 30 January 2025.
- After 30 January 2025, those investor statements will have no effect for any purpose, including if an individual has within 12 months completed and signed the investor statement.
Further Information
MBM Commercial LLP can provide template investor statements, along with accompanying information for their valid completion. If you would like to discuss anything relating to the Financial Promotion Regime and its practical implications on your business, then please contact us for an initial no-fee discussion.
While all reasonable care has been taken in the preparation of this blog, no responsibility is accepted by MBM Commercial LLP for any errors it may contain, whether caused by negligence or otherwise, or for any loss, howsoever caused, occasioned to any person by reliance on it. Individual advice should be sought before considering any of the matters detailed in this blog.