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U-Turn on High Net Worth/Sophisticated Investor Status

Date: 23/04/2024 | Corporate, Regulatory Law

Many startups and young companies rely on raising funds from friends and family who are in a position to offer support, but asking for investment is a highly regulated area. Failure to comply with the rules can lead to fines and even criminal charges against companies and their directors.

To find investors, you have tell people about the company and explain what you are offering. A “financial promotion” is any communication which contains an invitation or inducement to enter into an investment and these are regulated by the Financial Services and Markets Act 2000 (“FSMA”).  It requires that any financial promotion must either be approved by an authorised person, which is expensive and time consuming or it must fall within one of the exemptions included in the Financial Services and Markets Act (Financial Promotion) Order 2005 (“FPO”).

The exemptions most often used by smaller companies relate to High Net Worth (“HNW”) investors and those who qualify as Self-Certified Sophisticated Investors (“SSI”).  So what exactly are those? 

What are High Net Worth Investors and Self-Certified Sophisticated Investors?

A HNW is a person who has annual net earnings above a specified amount or net worth above a certain threshold and has delivered a statement to that effect to the company. 

An SSI is a person who meets one of four specified criteria which demonstrates they are a sophisticated investor and again has delivered a statement to that effect to the company. 

If a person confirms they are a HNW or SSI then you can send them information about investing in the company without having it approved.

The government’s criteria for High Net Worth or Self-Certified Sophisticated Investors

In January 2024 the Government changed the criteria for HNW/SSI’s.

They increased the annual income threshold for HNW from £100k to £170k and the minimum net worth threshold from £250k to £430k (excluding home, annual income and pensions).  They also increased the requirement for SSI’s to have been a director of a company with a turnover of £1 million to a turnover of £1.6 million.

These new restrictions were much criticized as they seriously impacted the ability of young companies to raise funds and after significant lobbying the government did a swift U-turn and has with effect from 27 March reinstated the previous thresholds.

What does his mean for investors?

The new format of the HNW/SSI declarations remains in place so companies should make sure they use the up-to-date form. It clearly warns investors that their funds are at risk and that all monies invested may be lost.

The government is carrying out further work to consider amendments to existing exemptions. There is concern that investors are not being properly protected and are not made sufficiently aware of the risks relating to early stage investing. Change remains on the horizon so if you plan to raise funds for your company always take professional advice to make sure you avoid incurring fines or committing a criminal offence.

If you have any questions about fundraising for your company contact Catherine Feechan, who is a director in our Corporate team.

The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.

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