50 shades of gray: navigating FCA guidelines on connecting companies to investors

FCA regulation around introducing deals and promoting investment in startups has been around for a long time, but, as the FCA itself admits, there’s still quite a bit of confusion around the topic.

Despite efforts to regulate the early-stage investment space, several common myths persist about FCA guidelines. It’s worth noting that most unauthorised organisations conducting regulated activities are doing so unaware of the fact that they’re breaking the law. 

It’s also quite common for organisations to believe they’re exempt from the need to apply for authorisation from the Financial Conduct Authority (FCA) to carry out regulated activities. 

In this article, we’ll be referring to this as the ‘50 shades of gray’ effect of FCA regulation, where a plethora of definitions, rules, exemptions and exclusions has led to widespread confusion. 

We’ll also attempt to ‘ease the pain’ and expose the ‘naked truth’ where it comes to financial services regulation. All puns intended.

Advising investors VS arranging deals

A common myth surrounding early-stage investment is that you’re only breaking the law when you’re ‘advising’ investors on which companies to support.

While ‘advising’ companies is defined by providing advice on financials and business plans, ‘advising’ investors equates to providing recommendations on equity investment.

Angel networks and other organisations involved in investor matching usually believe that the mere act of connecting a founder to an investor is not regulated.

While you may not be providing investment advice to investors (a regulated activity), you may be guilty of ‘arranging deals’ in investments without regulatory cover.
When you connect startups to investors, you’re doing so to allow them to discuss investment opportunities. Since that will lead to transactions, you’re legally the one ‘arranging’ the deal and need to be covered to do so legally.

Organizing pitch events

Setting up pitching events is a prime example of a situation that falls in a regulatory gray area. When you’re putting together a pitch competition, you may be ‘arranging deals’ without regulatory backing.

Incubators, accelerators and angel networks are free to set up pitch days, but the investors they invite to the events should be aware of the challenges and risks associated with early-stage investment.

Any marketing you’re doing for the events falls under the UK financial promotion regime, as long as you’re sending out an invitation or inducing engagement in investment activity. All financial promotions have to be approved by an individual who holds the relevant FCA authorization.

The FCA notes that failure to comply with financial promotion regulation could lead to the annulment of transactions and the obligation to pay damages to investors.

Investor certification

‘High Net Worth Individuals (HNWI)’ and ‘Sophisticated Investors (SI)’ may be invited to your pitching events, as long as you’re checking their certifications. According to the FCA, if you’re treating HNWIs and SIs as professional investors, it’s time to take off the blindfold.

‘Professional’ investors work in financial services and are either FCA authorized or exempt. Examples of professional investors are individuals working in venture capital or for a local authority

In contrast, ‘retail’ investors fall into distinct categories and specific restrictions apply to each category:

  • High Net Worth Individuals (HNWI) have an annual income of £100,000 or more and/or net assets worth at least £250,000 or more;
  • Self-certified Sophisticated Investors (SI) are either members of a network or have invested in unlisted businesses in the two years before attending the event;
  • Restricted investors have not invested more than 10% of their net assets in non-readily realisable securities in the last year; they also agreed not to do so in the coming year. 

Assuming that “High net worth individuals (HNWI)” and “Sophisticated investors (SI)” are “professional” investors can lead to regulatory issues. In addition to that, anyone showcasing investment opportunities is legally obliged to collect signed statements from investors confirming their status. Investors have to self-certify that they are aware of the risks they’re taking by investing in early-stage businesses. All certifications expire within 12 months and therefore need to be renewed. 

Using social media to promote investment opportunities

Section 21 of the Financial Services and Markets Act 2000 (“FSMA”) forbids communication that would lead to an individual buying shares in a company, without regulatory cover. Section 755 of the Companies Act 2006 bans offering shares to the public, unless you’re communicating with Professional investors.  

In layman’s terms, promoting your investment opportunity on your website or social media, including emailing on contacting investors through LinkedIn all fall within the financial promotion regime. Doing so qualifies as a criminal offence and you might have to pay back damages if you continue to do so. 

 

This article mentions the ‘50 shades of gray’ of regulation so we’d be remiss if we didn’t point out the large number of exclusions and exemptions which could apply to the scenarios discussed above. 

Always get professional advice to find out more about your regulatory position before connecting startups to investors. If the above applies to you, consider working with companies like Envestors in order to obtain Introducer or Appointed Representative status.

Envestors provides investment networks with regulatory cover throughout our whitelabel platform for early-stage investment. Through our customised, FCA compliant platform, your network can be up and running in days.