In response to criticism, the UK Government announced in the 2024 Spring Budget that recent changes to the financial promotion exemptions eligibility criteria would be partially reversed from 27 March 2024.
What are financial promotions?
Financial promotions are invitations or inducements to engage in investment activity communicated in the course of business. Given the negative impact of misleading financial promotions, they are tightly regulated under the Financial Services and Markets Act 2000 (FSMA) which prevents companies, or persons, from communicating financial promotions unless:
- they are an authorised person (or the communication has been approved by an authorised person); or
- the financial promotion falls within one of the exemptions contained in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO).
The most significant of these exemptions are for High Net Worth individuals (HNWI) and Self-Certified Sophisticated Investors (SSI) (under articles 48 and 50A respectively of the FPO).
The High Net Worth Individuals exemption
The HNWI exemption was introduced to make it easier for start-ups to raise capital from angel investors. It requires a completed and signed statement that the individual has annual earnings above a certain threshold or has a minimum net worth, and that that they understand what this means.
Once the individual has signed this statement, they can receive financial promotions.
The Self-Certified Sophisticated Investors exemption
The SSI exemption enables experienced investors with sufficient knowledge to receive promotions relating to shares or debentures of unlisted companies.
This exemption requires the individual to complete a signed statement in which they confirm that they meet at least one of four criteria indicating that they are a sophisticated investor (e.g., that they have experience working in the private equity or fund management sector).
What changes were introduced?
New requirements for these exemptions were introduced following a government consultation, necessitating a more rigorous assessment of an individual’s financial situation and investment experience.
These new requirements took account of changes in technology and social norms as well as inflation, and came into force on 31 January 2024:
the financial threshold for HNWI’s income was increased to at least £170,000 (from £100,000) or ownership of net assets (excluding home, pension, and certain others) of at least £430,000 (from £250,000); and
the requirement that an SSI had been a director of company with an annual turnover of at least £1 million was increased to £1.6 million and the need for an SSI to have made more than one investment in an unlisted company in the past two years was removed.
What was announced in the Spring Budget?
The Government announced in the Spring Budget that the changes to the eligibility criteria to qualify as a HNWI or SSI introduced on 31 January would be reversed, and that further work would be carried out to review the scope of the exemptions.
The reversal will take effect from 27 March 2024.
Why did the government change its mind?
The reinstatement of the changes comes following criticism of the new thresholds by a number of executives, tech groups, and start-up investors.
In an open letter to the Chancellor ahead of the Spring Budget, the Startup Coalition highlighted that the changes would put additional strain on an industry that is already struggling following peak angel investor activity in 2021, and that women and ethnic minority angels would be disproportionately affected.
Updated terms of investor statements
The content and format of the statements for HNWI and SSI were updated on 31 January 2024 to highlight to individuals that they could lose all the money invested, and that they would fall outside of the protections afforded by the FSMA.
Details of the business making the communication also now need to be included in any communications. These changes have not been reversed and will remain in force. The statements to be signed will, of course, be updated to reflect the reinstated thresholds.
Do I need to arrange for new statements to be signed?
No – any investor statements signed before 26 March 2024 will remain valid until (and including) 30 January 2025.
What steps should businesses take?
Despite the reversal, businesses intending to rely on the exemptions detailed above should still review their policies on financial promotion and in particular ensure that, from 27 March, their prescribed statements are up to date with the latest form. As the Government has stated that they will carry out further work on the exemptions, additional changes may still be on the horizon.
Our corporate finance team has extensive experience in helping businesses raise external investment. If you have any questions about the topics discussed in this article, or would like to discuss your approach to raising finance generally, please get in touch with our corporate finance team.
This article was co-authored by Trainee Thomas Mackie.