Preface

Legal and regulatory issues you must comply with in raising finance

Raising finance is a complex legal and regulatory area and you should be aware of the need to take legal advice during the process. In particular, sending a business plan to, or discussing it with, potential investors, is a financial promotion and this may require you or other persons involved in the process to be authorised or regulated here in the UK. In some cases, if you are not authorised by the Financial Services Authority, you may be committing a criminal offence or agreements entered into may not be enforceable against the other parties. Whilst financial promotions sent by those seeking funds to private equity houses will, in most cases, be exempt from restrictions in the Financial Services and Markets Act (FSMA), you should read the notes below for a summary of the various exemptions to the FSMA and the cautions on the inclusion of misleading statements in your financial promotion. We recommend that you seek professional/legal advice before communicating your plans to anyone. This section of the Guide is not intended to give legal advice nor substitute for you taking your own professional and/or legal advice in these areas.

The Financial Services and Markets Act (“FSMA”)

The FSMA came into force on 1 December 2001 and provides that "a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity". This does not apply if the person is an authorised person under the FSMA or the contents of the communication are approved by an authorised person. As you are likely to be raising finance to start-up or to expand your business it is unlikely that you will be authorised. However, the FSMA (Financial Promotion) Order 2001 (Financial Promotion Order) sets out various other main exemptions to the FSMA and these need to be carefully considered in each case.

The Financial Promotion Order differentiates between real-time and non real-time communications. A real-time communication is one that is a communication made in the course of a personal visit, telephone conversation or other interactive dialogue. A non real-time communication is one that does not fall within the definition of a realtime communication and includes letters, emails and publications (including TV and teletext). The Financial Promotion Order also sets out indicators to look for when determining if a communication is a non real-time communication. The indicators include if the communication is directed to more than one recipient in identical terms or if the communication is made in a way that the recipient cannot or is not required to reply immediately or can refer to it at a later time.

The Financial Promotion Order also distinguishes between solicited and unsolicited real-time calls, solicited calls being ones which are initiated by the recipient or take place following an express request (which is more than mere acquiescence) from the recipient.

Relevant exemptions to individuals or companies communicating business plans to potential investors include the following. Please note that, at the time of writing, the exemptions relating to the sale of body corporates and takeovers are under review. You are recommended to take legal advice before applying any of the exemptions outlined below.

Investment professionals
This exemption applies to financial promotions made only to or directed only at the following types of person who are sophisticated enough to understand the risks involved. These are:

• Authorised persons
• Governments and local authorities
• Professional firms who are exempt under the Act
• Exempt persons (where the financial promotion relates to a controlled activity which is a regulated activity for which a person is exempt).
• Persons whose ordinary business involves carrying on a controlled activity of the kind to which the financial promotion relates (i.e. private equity and venture capital firms, investment trust companies, large companies which have a corporate treasury function, other persons who carry on activities but are excluded by the Regulated Activities Order).

Also exempted are persons acting in their capacity as directors, officers or employees of such entities such as directors, officers or employees of authorised private equity and venture capital firms.

One-off communications
There are exemptions for one-off non real-time communications and solicited real-time communications in relation to certain categories of investments such as buying, selling or subscribing for securities and advising on investments. Subject to certain exceptions for solicited real-time communications, to benefit from this exemption, the communication must be made only to one recipient (or group who are expected to act jointly), it must identify the product or service and not be part of an organised marketing campaign.

High net worth individuals
High net worth individuals can sign a certificate exempting them from the general financial promotion restrictions of the FSMA in relation to certain categories of investments such as buying, selling or subscribing for securities or receiving advice on investments and in relation to non real-time communications or solicited real-time communications. To benefit from this exemption they must, inter alia, have an annual income of not less than £100,000 or net assets to the value of not less than £250,000, both as certified by their employer or an accountant. To fall within the exemption, the communication must be made to that individual and must relate to certain categories of investments that can include unquoted securities. It should be noted that, to be used, a certificate must have been provided before the relevant communication is made.

High net worth companies
Subject to certain conditions, the financial promotion restriction does not apply to communications in relation to certain categories of investments such as buying, selling or subscribing for securities and advising on investments which are made only to a body corporate which has net assets or called up share capital of £500,000 (if the company has more than 20 members) or £5,000,000 for other companies, a partnership or unincorporated association which has net assets of not less than £5,000,000, the trustees of a high value trust (assets of £10,000,000 or more) or to any director or officer of the high net worth company whose responsibilities include engaging in investment activity. The conditions are that the communication must describe the person to whom it is directed and state that it relates to controlled investments or activities, the communication must carry a health warning advising others not to act on it and provide that suitable procedures are in place to prevent others acting upon it. The distinction between real-time and non real-time communications is not made for this exemption, nor is there a requirement for a certificate as in the case of the exemption for high net worth individuals. Instead, the person making the communication must have a reasonable belief that the recipients are high net worth companies, etc.

Sophisticated investors
"Sophisticated investors" can sign a certificate exempting them from the general restrictions on financial promotion in relation to certain categories of investments such as buying, selling or subscribing for securities and receiving advice on investments, if they can produce a statement from an authorised person stating, inter alia, that that person is sophisticated enough to understand the risks involved in that type of investment. It should again be noted that, to be used, a certificate must have been provided before the communication is made. Any communication to a sophisticated investor must also be accompanied by certain "health warnings" to qualify for this exemption. This exemption is not limited to non real-time or solicited real-time communications. As there is no financial qualification (in contrast to the high net worth individuals exemption) it is likely to be more useful in marketing securities to private clients.

Associations of high net worth or sophisticated investors
There is also an exemption in relation to certain categories of investments such as buying, selling or subscribing for securities and advising on investments for non real-time communications or solicited real-time communications, which are made to associations of high net worth or sophisticated investors. This exemption is limited to situations where the investment is of a type which means that the person does not incur a liability to contribute more than he commits by way of investment, for example, a regular contribution to a business angel network.

Common interest groups of a company
A non real-time communication or solicited real-time communication in relation to investments in a company, such as shares and debentures, which is made to a group of persons with an existing common interest with each other and that company may be exempt. Again to be exempt the communication must be accompanied by certain "health warnings".

Sale of a body corporate
A communication made in relation to an acquisition or disposal of shares in a body corporate which satisfies certain conditions, such as that it relates to or will result in the sale of 50 per cent or more of the voting rights in a company to another body corporate, partnership, single individual or group of connected individuals, or which relates to the acquisition of day to day control of a body corporate, is exempt from the financial promotion restriction. There is also an exemption for takeovers, although this is subject to further conditions and requires further information to be provided.

There are also other exemptions available which may not be relevant in the case of private equity financing.

Misleading statements

The FSMA generally prohibits the inclusion of misleading statements in documents that are designed to induce or persuade people to enter into investment agreements or to buy or sell shares in companies. This would therefore apply to your business plan. Any person who makes a statement, promise or forecast or dishonestly conceals any material facts, or who recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive, is guilty of an offence if he makes the statement, etc. for the purpose of inducing (or is reckless as to whether it will induce) another person to enter or offer to enter into an investment agreement. Sanctions for a contravention of these provisions includes imprisonment up to seven years or a fine or both.

It is therefore essential that, irrespective of whether or not any of the exemptions in relation to financial promotions apply, any statement, promise or forecast contained in any communication, document, including a business plan, private placement memorandum, information memorandum, etc., made available to potential investors is verified in order to ascertain whether by itself, or taken in the context in which it appears, it could possibly be misleading or false or deceptive. This verification could be carried out by an authorised person such as an investment bank, corporate finance boutique or authorised professional services firm. If however you are sending your plan to a UK private equity house which is itself authorised then you do not have to have this verification process undertaken. You should nevertheless ensure that the plan does not contain misleading statements.

In case of any doubt, if you are seeking equity or debt finance, other than ordinary banking facilities, you are recommended to obtain legal advice before making any communications (whether written or oral) with potential investors, including the circulation of your business plan.

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