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  • Overview

    By Nick Gabay, Partner. Contact Thomson Snell and Passmore 01892 510000.

    Many directors we deal with are surprised to learn of the need to comply with financial promotions regulations when they supply information about their companies to potential investors.

    A company may seek an injection of investment funding for a number of reasons, ranging from solving short term cash flow difficulties to taking the company on to the next stage of its development.

    The financial promotions regulations apply to all companies, large and small and not just public listed companies.

    The basic rule is that it is unlawful to communicate an invitation or inducement to engage in investment activity during the course of business.

    This rule does not apply if the content of the communication has been approved by a suitably qualified financial adviser (which in many cases is likely to be prohibitively expensive).

    Because of the wide legal definitions of “communication” and “investment activity”, this means that practically any information you give with a view to promoting your company or generating interest among potential investors will put you at risk of breaking the law.

    This applies not only to formal communications such as prospectuses, business plans, presentations etc., but also to more informal situations – for example, a conversation with a potential investor at a social event.

    Failing to comply with the law in this area can potentially have severe consequences. Not only is it a criminal offence to engage in unlawful financial promotion, but significant civil liabilities can arise too.

    For example, if an investor later comes to regret hisor her investment decision, he or she may be entitled to claim his or her money back and compensation for any additional loss he or she has suffered.

    Also, a director of the company could potentially find himself or herself personally liable to compensate the investor (or the company)on the basis that he or she was the one who caused the company to contravene the law.

    Fortunately, the regulations provide for a number of possible exemptions to the general rule against unapproved financial promotions.

    The most common and straightforward of the exemptions are those which apply to communications made to “certified high net worth individuals” and “self-certified sophisticated investors”.

    A certified high net worth individual is an individual who satisfies certain criteria regarding his or her net worth (broadly speaking, if his or her annual income is more than £100,000 or his or her net assets (excluding his or her main residence and certain life insurance and pension assets) amount to more than £250,000).

    A self-certified sophisticated investor is someone who is a member of a network of business angels, has recently invested in an unlisted company, works in the private equity or SME finance sector or is (or has recently been) a director of a company with an annual turnover of at least £1 million.

    An investor intending to qualify under either of these exemptions must sign a statement confirming his or her status and all communications to the investor need to be accompanied by certain written statutory warnings relating to the disapplication of rules relating to financial promotions.

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