Written by Beth Jewell and John Roberts

New requirements relating to the promotion of certain investment types by unauthorised persons to high net worth and sophisticated individual investors have now come into force (from 31 January 2024). 

Background

These provisions relate to the high net worth and self-certified sophisticated investor exemptions contained within The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “FPO”). The FPO exemptions set out criteria under which unauthorised persons were able to promote certain investment types to certain individual investors (commonly known as “business angels”). However, the criteria had not been substantively updated since 2005. 

The FCA chief executive Nikhil Rathi wrote to the government in 2021 recommending for the exemptions to be reviewed, with the FCA also expressing a concern in the 2020/21 Perimeter Report that the exemptions were “no longer fit for purpose”. In response, HM Treasury has reviewed the criteria and conditions for when the exemptions apply and they have now been updated through amending legislation with a view to accounting for the significant economic, social, and technological changes that have occurred since the last update.

The changes

The key updates can be summarised as follows:

High net worth individuals (Article 48 FPO) 

The financial thresholds to be eligible for the high net worth individual exemption have been increased to: 

  • income of at least £170,000 in the last financial year (increased from £100,000); or 
  • net assets of at least £430,000 throughout the last financial year (increased from £250,000).

Self-certified sophisticated investor exemption (Article 50A FPO) 

The criterion of having made more than one investment in an unlisted company in the previous two years has been removed. In addition, the company turnover required to satisfy the ‘company director’ criterion has been increased to £1.6 million (from £1 million). 

Other notable changes include: 

  • a requirement on businesses to provide details of themselves in any communications that are made using the exemptions, such as their address, contact details and company registration details; and
  • updates to the relevant investor statements, with the aim of improving the format, simplifying the language where possible, and making changes that will require greater engagement from the investors completing them.

Parallel changes are also being made to the relevant exemptions in The Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001, covering the promotion of unregulated collective investment schemes to high net worth and sophisticated individual investors.

Impact

Given the investment types covered by these exemptions, they are commonly used by unlisted companies when fundraising and targeting potential individual investors. Finding an FPO exemption for such promotional activity is important for unauthorised businesses as the financial promotion restriction means that a criminal offence could otherwise be committed (assuming the promotion is not approved by an authorised person). The changes are also intended to help guard against misuse of the exemptions, including by businesses seeking to use the exemptions to market products inappropriately to ordinary retail investors.

Now these new requirements are in place, businesses may need to update procedures and reassess target audiences to ensure the new criteria are met before relying on the exemptions.

The new rules apply to new promotions made from 31 January 2024, with no transitional regime. Particular care will also be needed in relation to “live” interactions with potential investors in reliance on these exemptions. An assessment will likely be needed as to whether new financial promotions are being made (which would need to be in accordance with the updated exemptions) or whether it may be possible to rely on the separate FPO exemption for follow-up communications.