Raising finance: How not to break the rules on financial promotions

Financial promotions are a complex area and is defined in Section 21 of the Financial Services and Markets Act 2000 (FSMA) as being ‘an invitation or inducement to engage in investment activity, communicated by a person in the course of business.’ It applies to all forms of communication written or spoken, including whether they are made via social media or in print. 

Similarly, ‘in the ordinary course of business’ is intended to cover a wide range of scenarios, including, where a company is already in operation, it will be acting in the ordinary course of business if it seeks to raise additional share or loan capital. 

The FSMA states that anyone who is not an authorised person (regulated by a specific governing financial body) cannot during business, communicate an invitation or inducement to engage in investment activity unless the promotion has been made or approved by an authorised person, and/or it is exempt. 

This does not just apply to financial institutions but also to owner managed companies, or start–ups looking to attract funding.  

July 2020 saw consultation on a new regulatory framework. Responses were received and the Treasury published its formal response in July of this year.   We wait to see if there will be a simplified or new framework, but currently, the rules to consider remain those contained in FSMA. 

When seeking to ensure the communication complies with the section 21 restriction, the difficulty in ensuring most often arises in determining whether the communication is an inducement or invitation. The guidance suggests that the following be considered: 

• The intention of the communicator issuing the communication was to persuade the recipient to engage in an investment activity? Or  

• Regard the communication as seeking to persuade the recipient to engage in an investment activity?

The communicator needs to be confident that the communication is purely factual; for example acknowledging the existence of the investment opportunities and avoid any promotional element. It is unadvisable to offer advertisements, prospectuses with application forms, or promotions that try to actively initiate an investment activity; and/or directly invite a person to take steps that will result in their engagement in an investment activity. 

The financial restriction will not apply where the promotion has been approved by an authorised person/institution. In its consultation last year, HM Treasury publicised its concerns that authorised firms were approving promotions outside of their expertise and not conducting significant due diligence on the communicator. The consultation proposed several options that it hoped would impose higher obligations on authorised firms and therefore mitigate the risk of insufficiently vetted financial promotions.  

The restriction is a complicated area of legislation. Specific professional advice should be sort before making any communication that could fall under the financial promotion restriction given its broad application.