First time fundraising? Beware of the financial promotion regime

What is the financial promotion regime?

The financial promotion regime restricts the communication of an “invitation or inducement” to engage in investment activity in the course of the business. It is designed to protect ordinary individuals from relying on information from an unregulated person when investing their money.

Breaching the financial promotion regime is a criminal offence, with the person liable to a fine, imprisonment of up to two years, or both.

What does the regime have to do with my fundraise?

Founders need to know about these rules, because their pitch decks will be considered an invitation to engage in investment activity.  A disclaimer on the front of your deck stating that the pitch is not an offer to buy or sell securities to the public is a good start, but will not stop the regime from applying to you, as the view of the Financial Conduct Authority is that you are still asking someone to invest in the high-risk world of start-ups.

Although the criminal sanctions are a big concern, there are also commercial risks in breaching the regime which can arise in different situations.  For example, where a relationship with an investor has broken down, the regime can be used as a tool for the investor to pursue the founder and chase a refund on their investment.

Who can I take my pitch deck to?

There are exemptions to the financial promotions regime that you can rely on.  For founders, the key exemption is the right to raise money from certain types of investors, namely:

• High Net Worth Individuals (HNWI): to be considered a HNWI, they must either receive an annual income of at least £100,000, or hold assets of at least £250,000 (excluding a primary residence, pension, etc.); and
• Self-Certified Sophisticated Investors (SSIs): this is for experienced investors familiar with investing in early-stage companies, they must confirm they either:
  • Served as a director of a company with at least £1 million turnover;
  • Made more than one investment in an unlisted company in the past two years; or
  • Worked in a professional capacity in private equity or corporate finance for SMEs.
• Existing Shareholders: fortunately, there is also an exemption if the investor already holds shares in the company.

Whilst the regime can seem restrictive, it is important that you comply, as any misstep, even at an early stage, can create significant issues later on, and you do not want anything to limit your success!

How can Greenwoods help?

We are always happy to talk to a founder about their ambitions from the earliest stage of their business. We have experience advising on financial promotion and fundraising, and can share a disclaimer for your pitch deck, and forms to help you confirm who is a HNWI or SSI so that you are raising funds for your business in a compliant way.

Contact our Corporate & Commercial team for straightforward advice.