AQSE To Change SPAC Rules
In its Perimeter Report for 2020/21 the FCA has raised concerns that unauthorised persons are increasingly using, or purporting to use, exemptions from the Financial Promotions Order (FPO) to sell high risk investments and potential scams to ordinary consumers without their rules applying.
In particular the FCA is concerned about the “sophisticated investor” and “certified high-net worth individual” exemptions which were last reviewed in 2005 and do not set a particularly high bar for qualification - a sophisticated investor only needs to have made more than one investment in unlisted companies in the last two years, which is increasingly common in this age of online crowd funding, and to certify as high net worth all that is required is either an annual income of £100,000 or more or net assets (excluding primary residence and assets held in a pension) of £250,000 or more. The investor self-certifies that he or she meets the test, and a firm is not required to check this certification is accurate. The FCA has seen instances of this leading unregulated firms to coach investors to self-certify - in some instances even if they don’t meet the required criteria for the exemptions.
The situation is no longer acceptable to the FCA, which believes there needs to be significant changes to address harms for consumers arising from the current exemptions, and a consultation as on reform of the thresholds and self-certification system can be expected shortly.
While it is clear that the current system is being abused, and the thresholds require investors to be neither particularly sophisticated nor particularly high net-worth, these exemptions are very important in allowing smaller companies to fundraise in a cost-efficient manner. In particular imposing additional verification requirements on firms which wish to rely on them may increase costs of fundraising and as a result reduce the opportunities for smaller and start-up growth business to raise the capital they need to advance to the next stage in their life-cycle. The FCA will need to carefully balance the interests of consumers and the viability of fundraising when it considers how to address these issues.
John Young is a partner in the corporate and commercial team and specialises in the business needs of entrepreneurial, high growth and family businesses, advising them throughout their lifecycle - from start-up through to listing and beyond.
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