There are a growing number of small investor groups – typically with 50-200 members – that charge their members fees, in addition to the typical 5% cost they must pay to the operators of the investor groups when they arrange for them to invest in a company. Although the membership fees tend to be small – around £250 a year – should the operation/management of such investment groups be encouraged or are they contravening rules set out by the Financial Conduct Authority (FCA)?
It is well known that investment opportunities can be marketed to high net worth individuals and sophisticated investors without contravening the financial promotion regime (provided certain regulatory requirements are satisfied). However, once an investment opportunity has been promoted, firms then often arrange for investors to invest in the relevant deals.
For regulatory purposes, arranging the investment is treated differently to marketing an investment. As mentioned above, while there are exemptions from the financial promotion regime when marketing to experienced business angels, there are generally not any similar exemptions from carrying on the regulated activity of arranging deals in investments. This means that some firms may be carrying on this regulated activity, while not being aware they are doing so.
Oliver Woolley, CEO of Envestors, explains. ‘Most investor groups comprise of individuals who are classified as ‘sophisticated investors’ or ‘high net worth individuals’. These knowledgeable “angel” investors tend to make their own investment decisions and, as such, the manager of the investment group does not give them investment advice. However, arguably the manager of the investment group could be carrying on the regulated activity of ‘arranging deals’, in which case they should be regulated’.
‘The regulatory requirements are different when a person markets an investment opportunity, compared with when a person arranges for an investor to invest in a company’, explains Sam Robinson, Partner in the Financial Services Regulatory Group at CMS Cameron McKenna Nabarro Olswang LLP. ‘Taking into account the fact that carrying on a regulated activity without the required authorisation is a criminal offence, as well as the fact that any transactions entered into in these circumstances can be unwound, firms need to ensure they are aware of the regulatory position relating to all of the activities they carry on’.
Needless to say, if in doubt, always seek help from the experts.