Fundraising: changes to HNW and Sophisticated Investor exemptions

Posted Thursday 23rd November 2023

On 7 November 2023, HM Treasury published its response to its 2021 proposals to amend the financial promotion exemptions for “high net worth individuals” (HNWIs) and “self-certified sophisticated investors” (Exemptions).

Background

Under the UK’s financial regulation regime, the making of a financial promotions (for example, the offer of an opportunity to invest into an early stage – and thus risky – private company) is subject to a number of regulatory safeguards, in particular that such a promotion cannot be made unless it is made by an FCA-authorised person, or have been approved by such an FCA-authorised person. However, there are some exemptions to that general rule whereby promotions can be made to a certain groups’ recipients who, for public policy reasons, are effectively deemed to be capable of understanding the risks involved in the subject of the promotion such that those promotions can be made to them without either of those conditions being satisfied.

There are a large number of these exemptions, with two of them – those relating to HNWIs, and to sophisticated investors – having proved extremely useful (and therefore popular) in assisting small and medium sized enterprises raising finance from those categories of investor without the regulatory burden and cost of complying with the ‘authorisation’ elements of the financial promotions regime. However, after a three-month consultation period, they have been deemed by HM Treasury to not reflect economic, social and technological changes that have occurred since their introduction in 2001 and as such, the Treasury has decided to make a number of updates, effectively to tighten the rules.*

Key changes:

1. High Net Worth Investors

Under current rules: This term applies to individuals with an annual income of £100,000 in the previous year, or with net assets (which must exclude their primary residence and certain other items) of at least £250,000.
After the amendments take effect: Both thresholds will be increased: the annual income threshold will increase to £170,000, and the net asset threshold will go up to £430,000.

2. Self-certified Sophisticated Investors:

Under current rules: “Self-certified sophisticated investors” refers to (amongst other factors) those who have:
- served as the director of a company that has an annual turnover of at least £1 million in the previous two years; or
- made more than one investment in an unlisted company in the previous two years.
After the amendments take effect:
- The company turnover required to satisfy the ‘company director’ criterion will increase from £1 million to £1.6 million.
- It will no longer be possible to qualify as a Self-Certified Sophisticated Investor solely on the basis of having made investments in more than one unlisted company

3. Other changes/key points:

Companies issuing financial promotions using these exemptions will need to disclose basic details about themselves, including their address, contact information and registration details (e.g., the Companies House number or international equivalent).
Both of the forms of statement – for HNWIs and for Self-Certified Sophisticated Investors – that the investor needs to actually complete are being updated to reflect these changes – the previous forms, used widely across the industry, will no-longer be appropriate.
The Government had also consulted on increasing the responsibility on the promotions communicator so that they must have reasonable belief that the investor actually meets the relevant requirements for exemption. However, it has decided not to proceed with this amendment, meaning that the current requirement remains that the promotions communicator must have reasonable grounds to believe that the required statement has actually been signed by the investor.

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.

If you would like to discuss any aspect of these incoming changes as they relate to your business, please feel free to reach out to either Matt Overton or Rajiv Samani in our Corporate team who will be very happy to assist you.

* https://shorturl.at/rszL5

This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.