16. November 2023
On 7 November 2023, HM Treasury published its response to its earlier proposals to amend the financial promotion exemptions for "high net worth individuals" and "self-certified sophisticated investors" (Exemptions). Businesses looking to rely on the Exemptions should ensure that they are aware of and compliant with the updated requirements, which are due to come into force at the end of January 2024.
The Exemptions, contained in Articles 48 and 50A of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO), have played a key role in assisting small and medium sized enterprises (SMEs) raising finance from high net worth individuals, sophisticated private and 'business angels' without the regulatory burden and associated cost of complying with the financial promotions regime. However, they have been deemed by HM Treasury to not reflect economic, social and technological changes that have occurred since their introduction in 2001 and have been found to have been misused by firms.
As a result, in December 2021 HM Treasury launched a consultation to begin a dialogue on potential changes to the Exemptions, which included:
The government has now published its response to the Consultation, which we have summarised below.
In order to qualify for the "high net worth individual" exemption, an individual must now have:
Following updates made to the FPO in 2005, investors no longer have to be certified by a third party to use the "high net worth individual" exemption. Therefore, the exemption's name has been amended to remove the term "certified " from its title.
HM Treasury has amended the eligibility criteria for a "self-certified sophisticated investor" to remove the requirement to have made more than one investment in an unlisted company in the previous two years. This is to reflect the government's view that the criterion is no longer a suitable indicator of investor sophistication due to the fact that it is now much easier for ordinary retail investors to invest in unlisted companies and to participate without advice.
In addition, the eligibility criteria relating to a company director will be modified so that an individual who has been a director of a company with an annual turnover of at least £1.6 million in the last two years (an increase from £1 million) will qualify for this exemption. The government's rationale is that the increased figure demonstrates business success and sophistication, and that this will exclude less experienced directors.
HM Treasury has decided not to impose an increased degree of responsibility on businesses to ensure that the individuals they are communicating to meet the criteria for the Exemptions. It has also elected not to change the emphasis of the 'reasonable belief' test. This requires businesses to "believe on reasonable grounds" that the individual they are communicating to is a high net worth individual or self-certified sophisticated investor and is interpreted as meaning the individual has signed the high net worth individual or self-certified sophisticated investor statement. The government had consulted on whether the test should become one where the person communicating the financial promotion must have a reasonable belief that an individual meets the exemption criteria.
In support of its position, HM Treasury noted that there was evidence from stakeholders that these changes would "impose a significant barrier" on the way investors' review investment opportunities and that the proposals that are being taking forward reduced the risk of consumer detriment and allowed SMEs to continue to fundraise under the exemptions.
HMT is requiring businesses raising funds through the Exemptions to make more disclosures in their communications to investors. This aims to assist prospective investors in undertaking basic due diligence on the persons marketing investments as well as assist the FCA in its investigation of potential non-compliance with the Exemptions.
Such required disclosures include: the company address, contact information, and the company's registration details.
To encourage investor engagement and provide higher awareness of the regulatory protections that investors are losing when receiving financial promotions under the Exemptions, the investor statements associated with Exemptions have also been updated to improve the format, simplify the language used and improve investor engagement.
The substantive changes include:
The changes will be implemented through secondary legislation, which was laid out on 6 November 2023. The government anticipates the changes coming into force on 31 January 2024 and that there will not be any need for any transitional regime.
Article 14 of the FPO allows a business to make a follow-up financial promotion relating to the same matter within 12 months of the recipient receiving the first communication (provided certain requirements are met). If a business has made a financial promotion to an individual prior to 31 January 2024, in compliance with the Exemptions, it will continue to be able to engage with them in relation to the financial promotion made and will not need to ask for an updated investor statement.
From 31 January 2024, new financial promotions, even if made to individuals already promoted to under the current Exemptions, will need to be made in accordance with the updated Exemptions.
Our team has significant experience in navigating the financial promotion regime and can assist you with complying with the new requirements.
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