Once your company is up and running you may decide that in order to maintain or expand your business, you will raise equity finance by offering shares in your company. This route may appear to offer a 'win-win' opportunity: raising the company's profile whilst also injecting funds. However UK legislation sets out a strict regime which companies must adhere to when offering shares in the company, as this is considered to be a financial promotion.
General Principles
The Companies Act 2006 sets out a general prohibition on private limited companies offering shares in a company to the public. Specific rules regarding how a company can offer its shares are set out in the Financial Services and Markets Act 2000 (FSMA), the key restriction under the financial promotion regime is contained in s.21 of FSMA which states that a company:
"must not, in the course of business, communicate an invitation or inducement to engage in investment activity".
A financial promotion includes oral, written and electronic communications relating to an offering of shares, meaning that no matter the medium a company uses (whether it's via the internet, social media, email, a phone call, a conversation or a formal business meeting), the offering of shares will be subject to the FSMA regime. The penalty for breaching s.21 is either a fine or/and up to two years imprisonment, any agreements entered into as a result of an unlawful financial promotion are unenforceable and claims could be made for misrepresentation, insider dealing and/or market abuse.
When s.21 does not apply
FSMA sets out three circumstances in which the restriction contained in s.21 of FSMA will not apply:
- if the company is an authorised person under FSMA;
- if an authorised person has approved the content of the communication; or
- if an exemption applies under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (FPO).
Start-ups would most commonly rely on an exemption contained in FPO (as referred to at (3) above), in order to offer shares in the company without breaching s.21 of FSMA.
Exemptions
The FPO contains over 70 exemptions to s.21 of FSMA, however the exemptions which may be most relevant for start-ups are as follows:
1. The offer is made to investment professionals
The communication must be made only to people the person making the communication has reasonable grounds to believe are investment professionals and only directed at these recipients. The communication must also clearly state who the communication is directed at and that this is to the exclusion of others. An investment professional is inclusive of an FCA authorised firm e.g. a bank or broker
2. The offer is made to certified or self-certified sophisticated investors
This would include where an offer is only made to investors who have signed a statement in the form prescribed by the FCA, for example venture capitalists or angel investors.
3. The offer is made to high net worth individuals only
This communication must be non-real time (e.g. a letter, email or other form of correspondence) or solicited real time (e.g. the recipient requests or initiates a personal visit, telephone call or interactive dialogue).
A high net worth individual must have signed a statement in the prescribed form certifying that they had annual income equal to or in excess of £100,000 during the preceding financial year or had net assets with a value equal to or in excess of £250,000 (subject to certain additional financial qualifications e.g. this sum cannot include the individual's primary residence or any sum secured on it).
4. One-off communications
The communication must be either non-real time, or a solicited real-time activity which is made to only one recipient (or a group with the expectation they would jointly invest), and must be tailored to the recipient(s).
Start-ups should note that non-real time communications made in conjunction with a company listing its shares (e.g. in listing particulars / a prospectus) can also usually fall under an exemption.
Summary
Start-ups should carefully check whether its communications could be considered a financial promotion and should seek specialist legal advice to ensure that FSMA is complied with.
Disclaimer
The above is not a complete overview of financial promotions in the UK and should not be treated as legal advice. This article is intended only to provide high-level points which are relevant for start-ups companies and companies seeking to make financial promotions should seek legal advice before doing so.
Please contact the Trowers' team for more information. We have also produced a series of fact sheets to help you, so click here to access our online resources.