This article will be of interest to firms that wish to contact selected clients to promote investment opportunities.
The Financial Services and Markets Act (FSMA) 2000 states that only a firm authorised by the Financial Services Authority (FSA) may issue or approve a ‘financial promotion’. A financial promotion is widely defined as ‘an invitation or inducement to engage in investment activity, communicated by a person in the course of business’. There are exemptions within the Financial Promotions Order (FPO) which allow unauthorised firms (which includes DPB firms) to issue promotions in specific circumstances.
Financial promotions made to high net worth individuals and sophisticated investors are subject to a FPO exemption. The exemptions for high net worth individuals (article 48) and sophisticated investors (article 50(A)) are designed to reflect the typical characteristics of business angels and other sources of informal capital for start-up and small companies.
The exemption for high net worth individuals only applies to ‘non-real time’ and ‘solicited real time’ communications. Non-real time communications are brochures, websites, letters and emails, etc. Solicited communications are where the recipient has initiated the communication; for example where the client requests information about a specific investment or asks to be kept informed about any future investment opportunities in unlisted companies. The recipient must, therefore, have stated that he or she wishes to receive such communications. This restriction does not apply to sophisticated investors.
Exemptions under articles 48 and 50A only apply to certain types of investment, principally:
Promotions for the specific types of investment mentioned above can be issued under the exemption where the firm believes, on reasonable grounds, that the person is a certified high net worth individual. This means any individual who has signed a certificate within the 12 months preceding the promotion.
A high net worth individual is one who:
Some assets may not be included, such as the residential home, a pension or the proceeds of life assurance contracts. The wording and layout of the certificate are highly prescribed. Interestingly the FPO is silent about how the client gets a certificate! We assume that the process will involve a firm providing a client with a blank certificate which the client can sign if he or she thinks the above criteria apply.
The promotion that is made to the high net worth individual must be accompanied by a prescribed warning, which must be surrounded by a black border and given to the individual at the beginning of the communication. It must refer to its exempt status, again in a prescribed form, and outline the criteria which apply to high net worth individuals. Details are available in the FPO.
The promotion must also indicate that an individual who is in doubt about the investment being promoted should consult an authorised person specialising in investments of the kind in question. It was on this point that ICAEW alerted the Treasury that it was not appropriate to restrict this referral to an authorised person, since a DPB licensed firm can advise on unlisted shares. We received confirmation that, in addition to the reference to seeking advice from an authorised person, which must be included, the promotion can add a comment that an individual could also seek advice from a DPB licensed firm.
While this is extremely useful, DPB licensed firms should remember that they can only generally offer advice (a regulated activity) on unlisted shares. Where a DPB licensed firm undertakes a regulated activity, this must arise out of, or be complementary to, other professional services provided or to be provided to that client.
The exemption which applies to high net worth companies and unincorporated associations (Article 49) remains unaltered.
Under the revised exemption for sophisticated investors (article 50(A)), promotions can be made under the exemption if the firm believes, on reasonable grounds, that the person is a certified sophisticated investor; ie, one who has signed such a certificate within the 12 months preceding the promotion. The investments which can be promoted under this exemption are the same as for high net worth investors.
A sophisticated investor is someone who meets at least one of the following criteria:
The certificate is in a prescribed format, and the promotion must include warnings similar to those for a high net worth individual.
Basically the exemption allows promotions about unlisted companies. For promotions to sophisticated investors about other investments, the previous exemption under Article 50 remains. This requires a certificate signed by an FCA (previously, the FSA) authorised person.
For both high net worth and sophisticated investors, the firm must believe, on reasonable grounds, that the person is a certified individual. We suggest that an individual is asked to confirm that he or she has such a certificate before any financial promotion is made. This is not a legal requirement but seems a sensible precaution.
These arrangements simply mean that an unauthorised firm can make a financial promotion. However, as the requirement for a firm to sign a certificate has gone, the firm making the promotion can now give advice, providing it is appropriately authorised or licensed under the DPB arrangements.