Be aware of the many shades of grey when it comes to FCA regulation

Why accelerators, incubators, and networks matching investors and start-ups need to be regulated

By Oliver Woolley, CEO of Envestors

Financial services regulation is a hugely complicated area. The handbook which helps distil the regulation itself makes the Fifty Shades series look like a novella. The glossary alone takes up 583 pages. 

This complexity has created grey areas and led to wide-spread issues in the early-stage investment space with many unauthorised organisations conducting regulated activities, either unaware they are doing so or under the belief that they are somehow exempt.

Here we review the most common grey areas surrounding financial services regulation in early stage investing.

I am not regulated, so I don’t need to be concerned about this.

This is like saying, ‘I don’t have a license to drive, so the highway code doesn’t apply to me,’ and yet it is a real misconception in the market.

As an unregulated network or introducer you can be reported to the FCA.  If you are found to be undertaking regulatory activity, e.g. “arranging”  deals in investments, without the required FCA permissions, it is a criminal offence and the individuals responsible for operating the unregulated network won’t just get a gentle slap on the wrist, they might find themselves in handcuffs.  Also, any transactions could also be unwound, and you could have to pay damages.

I am not giving advice to investors, so I don’t fall under the regulations

This is a common interpretation we hear from angel networks and other organisations who help match start-ups and investors. The grey area here is around the word ‘advice’ and how you’re actually interacting with both investors and start-up companies.

Let’s consider the term ‘advising’ and it’s meaning from a regulatory perspective.  When we’re discussing equity investment, ‘advising’ falls into two categories:

  • Advising companies about raising investment i.e. providing corporate finance advice to start-ups with regards to matters such as valuation and deal structuring and
  • Advising investors about investing i.e. providing recommendations in respect of making investments.

The definition of investment advice is quite broad, so if you’re running an investment network and you’re not saying to investors, ‘put your money in this deal’ you’re in the clear, right?

Wrong.

While you may not be carrying on the regulated activity of providing investment advice to investors, you may be carrying on a different regulated activity: arranging deals in investments.

The FCA defines arranging as bringing about deals in investments, making arrangements, with a view to transactions in investments, or agreeing to carry on either of those regulated activities.

Here you can see an organisation that brings together investors and start-ups for the purposes of showcasing or discussing investment opportunities that will lead to transaction, is very likely carrying on the regulated activity of ‘arranging’. 

However, there are certain exclusions and exemptions which could apply, so you should obtain advice to confirm your exact regulatory position.

Anyone can run a pitching event to help start-ups

Yes, anyone can arrange a pitching event. But. But. But. . .

There are a number of caveats that you need to be aware of before you start sending out invitations.

You must ensure that the investors you invite are at the right kind of investors. The right kind of investors are the kind with money, right?

Not exactly, because, any marketing which is capable of having an effect in the UK, which involves an invitation or inducement to engage in investment activity, would fall within the scope of the UK financial promotion regime.  Similar to regulated activities, breach of financial promotion is a criminal offence, transactions could be unwound, and you could have to pay damages.

To avoid getting yourself in a bind, ensure any financial promotions are:

(a) issued by an FCA-authorised person;

(b) approved by an FCA-authorised person; or

(c) fall within an exemption from the financial promotion regime.

I am only targeting high net worth individuals, so I don’t need to be regulated

There are exemptions that apply to certain classifications of investors and rules around how you can market and interact with each.

One such a class of investors is called ‘Certified High Net Worth Individuals (HNWI),’ who have signed a HNWI statement within the last 12 months.  If you request a copy of the HNWI certificate for each person, then you know that your audience is HNWIs and falls within this exemption.  However, you still have to be extremely cautious not to move beyond making a financial promotion, into the regulated activity of arranging either before or after your event. The exemptions that apply to the financial promotion regime do not generally apply to regulated arranging.

It is not uncommon for networks, post marketing, to help seal the deal by facilitating communication between the start-up and the investor. This is exactly the kind of behaviour that is likely to amount to the regulated activity of arranging and arouse the interest of the FCA.

I can promote my equity investment opportunity on social media  

Posting your investment opportunity on your website, via your social media or targeting investors via LinkedIn is likely to fall within the financial promotion regime and will leave you open to scrutiny by the FCA.  Breach of the financial promotion regime is a criminal offence and transactions could be unwound and you could have to pay damages. 

As stated above, under Section 21 of Financial Services and Markets Act 2000 (“FSMA” – a tortuous but important bit of legislation protecting investors), any communication which invites someone to buy shares in their company is a financial promotion and, unless you are confident the communication is exempt or has been approved by a FCA registered firm, it is a criminal offence to make such a communication.

If that hasn’t put you off, section 755 of the Companies Act 2006 prohibits private companies offering shares to the public, unless various conditions are met, such as making the offer to fewer than 150 people or to qualified professional investors.

To avoid breaching any of these regulations, you may wish to consider two things:

1. In relation to the financial promotion regime, ensuring any financial promotions fall within an exemption or have been signed off by a FCA authorised firm and

2. In relation to arranging, ensuring that all investment transactions are arranged through an investment platform which is managed by an FCA authorised firm with permission for arranging, which will also ensure investors go through a proper investor classification and risk awareness process.

These are just a few of the common misconceptions that we see. If you feel like you’re floundering in the dark when it comes to regulation, there are firms that can help. For example specialist lawyers can be consulted and regulated firms like Envestors are able to offer Introducer and Appointed Representative status —giving you more than ample cover without having the cost of becoming regulated in your own right.

It is time for networks working in the exciting world of matching start-ups with investors to take off their blindfolds and submit to regulatory requirements. When this happens and all the players have confidence that investors are fully aware of risks, and importantly that opportunities are ‘clear, fair and not misleading,’ it will mean more start-ups will benefit. This will be excellent to see in the current, challenging environment.

ABOUT THE AUTHOR

Oliver Woolley, CEO of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.

Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.

Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through our own private investment club.

Envestors is authorised and regulated by the Financial Conduct Authority.

Web: https://www.envestors.co.uk/

LinkedIn: https://www.linkedin.com/company/envestors-llp/

Twitter: @EnvestorsLondon

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