We reported in January on the long-overdue update to the conditions under which companies seeking funding could approach individuals without the need to have any promotional communications approved by a financially regulated firm.  These changes, which took effect on 31 January, have proved very short-lived, and new limits now apply from 27 March 2024.

What's happened?

As we explained in our previous article, the thresholds that individuals needed to meet to be classed as either "high net worth" or "self-certified sophisticated" investors, which in turn would enable them to sign certificates agreeing to forego various regulatory protections when investing in the securities of unlisted companies, had been in place since 2005. So they were long overdue an update, and respondents to HM Treasury's consultation on increasing the limits agreed that the previous levels were no longer appropriate and could lead to individuals who were not really rich or sophisticated enough to make these unprotected investments being able to do so. There were, of course, some dissenting views, but the Government, with the full support of the FCA, made the changes.

In a bizarre U-turn, Chancellor Jeremy Hunt announced in March's budget that the Government had decided to reinstate the previous threshold levels. It has done this without consultation, and the Budget speech gave no reason. In the explanatory note that accompanied the changes, the Government explained that significant concerns have been raised that the higher thresholds could affect the ability of start up business to get investors, and the ability to finance theatre productions through small-scale investors.

What are the new limits?

The upshot of all this is that the new form of statement introduced in January remains, but the conditions that must be met are now:

  • For High Net Worth Investors: to have at least £100,000 income in the previous financial year or to have held net assets of at least £250,000 though the previous financial year (excluding primary residence, pensions and insurance)
  • For Self-Certified Sophisticated Investors: to have either (i) worked in a professional capacity in the private equity sector or in providing finance to SMEs in the last two years (ii) made two or more investments in an unlisted company in the previous two years, (iii) been a director or a company with an annual turnover of at least £1m in the last two year or (iv) been a member of a network or syndicate of business angels within the past six months and still be a member.

Statements signed between January and March using the higher thresholds will still be valid up to and including 30 January 2025.

What happens next?

The FCA has made its views clear. It is not happy with the U-turn. It says that, even with the short-lived increased limits, the UK was still an outlier in terms of the various thresholds. It has previously said that the criteria for "sophistication" risks ordinary investors being able to classify themselves as sophisticated and as a result end up buying unsuitable investments.

HM Treasury has now committed to reviewing the conditions for exemption (but not to a timescale for doing so), and the FCA has said it will continue to work with the government on how there can be an appropriate balance between avoiding consumer harm while ensuring access to sustainable sources of finance for growing businesses.

Watch this space!

This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.