Important changes to the Financial Promotion regime exemptions for High Net Worth Individuals and Self-certified Sophisticated Investors coming into force on 31 January 2024

Nick Williams

Nick Williams

Partner

In response to concerns raised by the Financial Conduct Authority, the government has updated the exemptions which allow shares and other financial instruments to be marketed to Certified High Net Worth Individuals and Self-certified Sophisticated Investors without the regulatory protections provided by the financial promotion regime.

What is the current position?

Under that regime a person must not, in the course of business, make a financial promotion (communicate an invitation or inducement to engage in investment activity, such as buying or selling shares or other financial instruments), unless that person is an authorised person (such as a financial advisory firm or broker), or the content of the communication is approved by an authorised person or the communication is covered by an exemption.

Commonly used exemptions apply where shares in unlisted companies are offered to investors qualifying as Certified High Net Worth Individuals and Self-certified Sophisticated Investors under the Financial Promotion Order. There are a number of requirements that need to be satisfied and in each case the investor must have signed a statement in a prescribed form confirming that they meet certain criteria: in the case of Certified High Net Worth Individuals, that they have at least a specified amount of remuneration or certain net assets, and in the case of Self-certified Sophisticated Investors, that they have specific professional or investment experience. Equivalent exemptions apply to the promotion of Collective Investment Schemes which will also change.

While use of the exemptions has been a valuable means of raising funds for unlisted SMEs over the last 20 years, there have been significant changes during that period, including the development of the online retail investment market and price inflation which have effectively eroded the value of the exemption thresholds, so that a significant number of additional consumers now fall within the scope of the exemptions.

What will change?

A number of changes will come into force on 31 January 2024 without any transitional period for the new rules.

For High Net Worth Individuals (the “Certified” will be dropped): the financial thresholds to be eligible for the individual exemption will be an income of at least £170,000 in the last financial year (raised from £100,000), or certain net assets of at least £430,000 throughout the last financial year (raised from £250,000).

For Self-certified Sophisticated Investors: the exemption will be amended by removing the criterion of having made more than one investment in an unlisted company in the previous two years and the annual company turnover required to satisfy the "company director" criterion being increased to £1.6 million (from £1 million).

The statements to be completed and signed by investors will be in a different format reflecting those changes and, in addition, businesses will be required to provide details of themselves in any communications made using the exemptions, to help prospective investors undertake basic due diligence on the persons marketing investments.

What action is required?

For new financial promotions made from 31 January 2024 firms must ensure that high net worth individuals and self-certified sophisticated investors meet the revised conditions in the updated exemptions and accordingly the investors will need to complete and sign new statements in the revised formats, if they still qualify, even if the promotions are made to individuals already promoted to under the pre-existing exemptions. However, where a business has made a financial promotion to an individual before 31 January 2024, in compliance with the then existing exemption, that business will continue to be able to engage for a certain period of time with the relevant individual in relation to the financial promotion made and will not be required to request an updated investor statement.

If you require legal advice or assistance in relation to the changes described, please get in touch with your usual contact at DMH Stallard LLP or Nick Williams at nick.williams@dmhstallard.com or by phone on 0797 969 3955.


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