New rules regarding financial promotions – EIS and SEIS funds should take note

New rules regarding financial promotions:

New rules have come into force as of 31 January 2024 regarding the UK’s financial promotion rules. Very broadly under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) and the Financial Services and Markets Act 2000, communication which amounts to promotion of an investment in shares or securities may only be made by certain authorised persons or where an exemption under the FPO applies.

Two key exemptions are those for sophisticated investors and high net worth individuals (HNWIs). Financial promotions may be made to individuals who meet these criteria by non-authorised persons or organisations. However, following a consultation run by HM Treasury and HMRC’s responses published in November 2023, the Government has enacted changes to these exemptions, broadly as follows:

• Self-certified sophisticated investor exemption:
  1. removal of the exemption requirement that an individual has made an investment into an unlisted company in the last 24 months; and
  2. amending the separate requirement relating to an individual who is a director of a company: in line with inflation, the company must have had an annual turnover of at least £1.6m in the last two years (up from £1m).

• HNWI exemption – Increase in the financial thresholds for investors:
  1. must have income of at least £170,000 (up from £100,000) in the last financial year; or
  2. net assets of at least £430,000 (up from £250,000) throughout the last financial year.

These new rules apply from 31 January 2024 (including regarding promotions to individuals who have been the subject of promotions prior to this date).

EIS and employee share scheme angle:

The new rules will be of particular interest to persons such as fund managers and other professional advisers who are seeking to solicit investment from angel or other wealthy investors under tax efficient investment schemes such as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

In addition, it is very common for companies wishing to entice or retain senior talent to offer remuneration through shares or share options (noting that shares are a type of security for financial promotion purposes). There is a broad exemption in the FPO for companies offering such sweeteners where this is pursuant to an employee share or share option scheme. Care should however be taken that this exemption is not relied upon for solicitations or promotions to non-employee investors (including consultants or non-executive directors). This could jeopardise the company’s reliance on the promotion exemption and potentially call into question the status of the scheme as an ’employee’ one for company law purposes. Companies should remain vigilant in treating dealings with employees and non-employee investors appropriately and separately from a promotions and general legal (and tax) perspective.

How we can help:

While Michelmores does not advise on the regulatory or financial promotions side, we have extensive knowledge of the EIS, SEIS and other venture capital tax schemes and their accompanying reliefs, for both investors and investee companies. If you have any queries relating to tax relevant to these schemes or to equity fundraising generally then please get in touch.