Updates to the Financial Promotion Order for HNWIs and SCSIs

The promotion of investments in the UK is subject to the restriction contained in section 21 of the Financial Services and Markets Act 2000 (“FSMA”) (the “Financial Promotion Restriction”) which provides that communicating an invitation or inducement to engage in investment activity may only be made:

1.by a person authorised under FSMA;

2.where the content of the promotion has been approved by such an authorised person; or

3.in reliance upon an exemption as contained in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “FPO”)

The FPO contains specific exemptions from the Financial; Promotion Restriction which provide that certain financial promotions can be communicated to certain persons (or groups or persons), which includes the exemptions relating to HNWIs and SCSIs.  These exemptions (when complied with fully) enable HNWIs and SCSIs to receive a limited range of financial promotions on an exempt basis. The exemptions here are intended to provide persons who qualify as HNWI or SCSI access to private capital fundraising opportunities. The exemptions originally provided that the HNWIs and SCSIs must meet the following specific criteria:

1.Certified HNWIs evidence their eligibility by certifying a minimum annual gross income of £100,000 or net qualifying assets of £250,000 in the preceding financial year; and

2.SCSIs similarly certify that they meet at least one of following criteria:

1. He/ she has worked in a professional capacity in the private equity sector or in the provision of finance for SMEs in the last two years;
2. He/ she has been a director of a company with an annual turnover of at least £1m in the last two years;
3. He/ she has been a member of a network or syndicate of business angels for more than 6 months and are still a members; and / or
4. He/ she has made two or more investments in an unlisted company in the previous two years.

Recent changes

We recently provided an update detailing changes made by the Treasury which came into force on 31 January 2024 by virtue of The Financial Servies and Markets Act 2000 (Financial Promotion) (Amendment) (No.2) Order 2023 (S.I. 2023/1441) (the “2023 Order)”. The HNWI value thresholds was increased in line with inflation, meaning that the minimum annual gross income threshold and net qualifying asset threshold increased to £170,000 and £430,000 respectively. In addition, one of the four tests for SCSIs which required the SCSI to have made two or more investments in an unlisted company in the previous two years, was withdrawn as it was thought that this was not an adequate assessment of an individual’s assessment as sophisticated for these purposes.

Changes to be implemented as of 27 March 2024

In response to the 2023 Order, we understand that the technology, angel investing and theatrical investment sectors raised concerns that the changes in the 2023 Order would adversely affect the ability of a range of start-up businesses to raise critical investment, and that smaller businesses (in general. But specifically those involved with theatre and entertainment productions) would be seriously hampered. Doubtless, these concerns articulated themselves against the backdrop of the UK economy officially moving into recession at the end of 2023.   In response to these concerns, the Government took the opportunity to announce in the context of the Spring Budget on 6 March 2024 that it was proposing to reinstate all of the previous eligibility criteria to qualify as a HNWI or SCSI.

Consequently, the SI, which comes into effect automatically on 27 March 2024, amends the criteria to be eligible for the exemptions by restoring the position from prior to the end of January 2024.   But and this is important, the FPO as amended under the 2023 Order will retain the updated format of the investor statement which was introduced by the 2023 Order. The key changes can be summarised as follows:

1.The financial threshold for minimum annual gross income and net qualifying assets will be reduced back down to the original thresholds of £100,000 and £250,000 respectively in the preceding financial year. However, Investors must now still give an indication to the nearest £10,000 of their actual annual gross income or of their actual net assets (depending on which limb of the HNWI certification they choose to rely upon).

2.The criteria to be eligible under the SCSI exemption has been updated such that:

1. the requirement to have made two or more investments in an unlisted company in the previous two years has been reinstated following its removal under the 2023 Order; and}
2. the company turnover required to satisfy the company director criteria has been reduced back to £1,000,000. This means that individuals who have been directors of companies with at least £1,000,000 turnover in the past two years will remain eligible under the SCSI exemption.

3.The investor statements which were introduced by the 2023 Order will remain valid up to and including 30 January 2025. The aim here is to ensure that those who have recently completed and signed statements complying with the 2023 Order do not need to complete and sign an updated investor statement following the implementation of the 2024 Order and so communications that have been sent to investors on the basis of these investor statements remain exempt communications for the purposes of the FPO. (This is entirely logical, in that a person able to certify £170,000 of gross income under the 2023 Order criteria is obviously able to certify £100,000 of gross income under the SI.)

Authored by Eva Wichtowski and Alexandra Heron

For more information on this topic, please reach out to Daniel Tunkel, Head of Financial Regulation, or Alexandra Heron, Associate.