Why can’t I just go out and raise the capital I need?
The law starts from the premise that the ordinary person in the street deserves to be protected from people offering investments, and in particular shares, for sale to them. The logic is that these sorts of investments often require relatively significant sums of money and that is it not easy for an investor to know at first glance what constitutes a “good” investment. The law, therefore, is very prescriptive about what you can do to raise investment.
What does the law say then?
There are actually several overlapping layers of legislation and you will need to comply with them all to avoid committing an offence.
Let’s assume that you have prepared a general executive summary of your business and now want to approach an investor. In the eyes of the law, you have prepared an “invitation or inducement” to subscribe for or buy shares or debt securities (and potentially some other categories of investment). This is termed “financial promotion”. Financial promotions can be written or oral. Financial promotions must either be communicated or approved by someone who is authorised under the financial services legislation (eg an investment bank or an IFA), though this may be expensive and impractical), or financial promotions must be entirely covered by the statutory exceptions. These exceptions cover both what you say and to whom you say it.
Set out below are the most commonly used exceptions – and these have been simplified, because the exceptions themselves are very complex.
One-off communications: these are highly personalised, non-standardised communications to the person being contacted – this may be more helpful, for example, when you have already lawfully contacted an investor and you are now answering questions about the potential investment.
Communications to some overseas persons: communications can be made to individuals resident outside the UK, but need to be accompanied with a required set of bespoke and tightly drafted conditions and risk warnings. Do note though that this is an exception for the UK laws, you will also need to check the laws of the country in which the communication is being received.
Investment professionals: communications can be made to FSMA regulated persons including investment funds, venture capital firms as well as some others. If you are relying on this exception then you should require sufficient evidence that the recipient is an investment professional in the eyes of the law before making the communication and you should place an appropriate warning in the terms required by the legislation on the communication.
High net worth individuals: some communications can be made to wealthy individuals with a sufficiently high income and personal wealth – within the levels set out in detail the legislation. If you are relying on this exception then you will need a certificate (dated not more than 12 months before the communication) following the strict terms required by the legislation that the recipient is a high net worth person before making the communication and again you will need to give strict warnings, usually on the communication. This exception only applies to written communications or oral communications which the potential investor has requested.
Sophisticated investors: this is similar to the exception relating to high net worth individuals. Communications can be made either to individuals who have certified themselves as sophisticated not more than 12 months before the communication or those who have been certified by an FSMA authorised person as sophisticated not more than three years before the communication. The onus is on you to check the certificate has been issued and yet again, you will need to give further (different) warnings, as part of the communication. If an investor certifies himself as sophisticated, then this only covers investment in unlisted companies, whereas certification by an FSMA authorised persons covers a wider range of investments.
Associations of high net worth or sophisticated individuals: groups of people falling into the preceding two categories.
Untrue statements and giving inaccurate profit forecasts
Lastly in relation to the materials you provide to potential investors, you must avoid making untrue statements and giving inaccurate profit forecasts, and this may lead to you having to compensate investors in certain circumstances. There are also specific criminal offences under FSMA relating to making statements, promises or forecasts which are misleading or untrue. Remember also that if you do not comply with the rules on financial promotions described above, an investor may be entitled to sue you for their money back.
Tony Watts is a solicitor at Keystone Law, specialising in financial services and investment. You can email him at email@example.com
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