Employment Law - Regulatory Law Specialist

Financial Services
Seminar 3
10th July 2014
This seminar is directed at
commercial and regulatory lawyers
working with the financial services
industry who may need to advise
clients on:
The scope of regulation when
offering shares in a company for sale
to the general public.
The scope of regulation when
applied to promoting financial
The context for this talk is up turn in
all sectors of economy taken up
where banks remain reluctant to lend
to SMEs and businesses may be
looking to raise funds from private
The general prohibition on offering shares for sale
without an FCA approved prospectus
There is a general prohibition on the offer for sale of transferrable
securities in the UK unless the prospectus making that offer satisfies
the Prospectus Rules and is approved by the FCA (s85 (1) FSMA).
Section 85 (1) of FSMA provides that,
“ 85 (1) It is unlawful for transferrable securities to which this subsection
applies to be offered to the public in the United Kingdom unless an
approved prospectus has been made available to the public before the
offer is made.”
Section 85 (3) of FSMA makes it a criminal offence punishable with up
to 2 years imprisonment to contravene section 85 (1).
What is a transferrable security for the purposes of the
general prohibition on the sale of transferrable
securities without an approved prospectus?
“Transferrable securities” are defined by the Prospectus Directives
2003 and 2010 and by reference to Directive 93/22/EEC. The
Directive describes transferrable securities in this way:
"Transferable securities" means those classes of securities which are
negotiable on the capital market, such as government securities, shares
in companies…”
This is a broad definition which includes most classes of share
Would the sale of shares in a company that are not in
fact to be listed on capital markets come within the
general prohibition?
Most types of company shares are transferrable. Even if it is not
proposed that the shares in the company to be sold are to be offered
to regulated markets like AIM or the London Stock Exchange, the
shares in a company are still transferrable.
Thus shares in a company belong to a class of security are negotiable
on the capital market, namely equities (even if the proposal is that the
share in question is not offered in fact offered on the capital markets).
A share offering that relates to transferrable securities that may be
negotiated on a capital market needs an FCA approved prospectus to
be lawfully promoted and sold.
Are there exceptions to the general prohibition on offering
securities to the public without an FCA approved prospectus
that relate to certain types of securities?
Section 85 (5) FSMA provides that,
“85 (5) Subsection (1) applies to all transferrable securities [THE GENERAL
PROSPECTUS APPROVED] other thana)those listed in Schedule 11 A;
b)such other transferrable securities as may be specified in the prospectus
Schedule 11 A generally relates to investments that would appeal to
institutional investors of one type or another.
As a rule of thumb: share offerings to the public require an FCA approved
Prospectus to be lawful.
When is an offer of transferrable securities made to the
There is no definition of “the public” in the Prospectus Directive.
However the Directive does provide at Article 2 (d) that:
"offer of securities to the public" means a communication to persons in any form
and by any means, presenting sufficient information on the terms of the offer
and the securities to be offered, so as to enable an investor to decide to
purchase or subscribe to these securities. This definition shall also be applicable
to the placing of securities through financial intermediaries”.
The purpose of both Directives is to protect investors and to allow the
smooth running of markets.
The offering of shares to sophisticated retail investors would include “the
public” for the purpose of section 85 (1) FSMA.
If there are few exceptions to the type of share that needs an
approved prospectus, are there exceptions to the type of
investors who need to see an approved prospectus?
There are exceptions to the prohibition in section 85 (1) and (3) FSMA contained
in section 86 FSMA. Those exceptions are as follows:
The offer is made to or directed at qualified investors only [qualified in the sense of
being professional investors] OR,
The offer is made to or directed at fewer than 150 persons other than qualified investor
per EEA state OR,
The minimum consideration which may be paid by any person for transferrable
securities acquired by him pursuant to the offer is at least 100,000 Euros [Note; this
has increased from 50,000 Euros by the Prospectus Directive 2010] OR,
The transferrable securities being offered are denominated in amount of at least 50,
000 Euros; OR
The total consideration for the transferrable securities being offered cannot exceed
100,000 Euros (or equivalent amount).
Who are qualified investors?
The persons who may be offered these shares can include private
individuals providing the minimum investment to be made by them is
100,000 Euros.
Otherwise, the share offering must be directed at qualified investors
A “qualified investor” has a specific meaning under FSMA and the
Prospectus Rules but is generally speaking a person authorised by the
FCA to deal in transferrable securities by way of business.
A qualified person need not be a government body.
Note: the Prospectus Rules prohibit the offer of shares to the public
unless the Prospectus has FCA approval or the share offering is aimed a
specific class of professional investor.
The general prohibition of promoting many financial
Section 21 FSMA provides is that in the course of business,
unauthorised persons must not communicate an invitation or
inducement to engage in investment activity unless the content of the
communication is approved by an authorised person or is exempt.
Invitation or inducement?
FSMA does not contain any definition of the expressions “invitation” or
inducement” leaving them to their natural meaning. The ordinary
dictionary entries for “invitation” and “inducement” offer several
possible meanings for the expressions. An “invitation” is capable of
meanings from merely asking graciously or making a request to
encouraging or soliciting.
The word “inducement” is given meanings ranging from bringing about
to prevailing upon or persuading. In guidance issued pursuant to the
section 139 A FSMA, the FCA has indicated it will look closely at the
context of words and behaviour to see if they come within these
definitions (PERG 8.4.1 G).
The FCA guidance on what is meant by invitation or
inducement… continued.
InvitationThe FCA guidance provides states as follows:
“PERG 8.4.5 G
An invitation is something which directly invites a person to take a step
which will result in his engaging in investment activity. Examples include:
1) Direct offer financial promotions.
2) A prospectus with application forms.
3) Internet promotions”
The FCA guidance on what is meant by invitation or
PERG 8.4.6 G
“Merely asking a person if they wish to enter into an agreement with no
element of persuasion or incitement will not, in the FCA’s view, be an
invitation under section 21. For example, the FCA does not consider an
invitation to have been made where:
1) A trustee or nominee receives an offer document of some kind and asks the
beneficial owner whether he wishes it to be accepted or declined;
2) A person such as a professional adviser enquires whether or not his client
would be willing to sign an agreement; or
3) A person is asked to sign an agreement on terms which he has already
accepted or to give effect to something which he has already agreed to do.”
Inducment –
PERG 8.4.7 G describes an inducement as,
“A significant step in persuading or inciting or seeking to persuade
or incite a recipient to engage in investment activity”
Are there exceptions to the prohibition on inviting or
inducing persons to invest in regulated activities?
There are two exemptions to the rules against financial promotions by
unauthorised persons. They relate to:
Certified high net worth individuals (see Art 48 Financial Promotions
Certified sophisticated investors (see Art 50 Financial Promotions Order).
The exemption from authorisation for high net worth
This exemption disapplied the restriction in section 21 to financial promotions which
are made to a person who the communicator believes on reasonable grounds to be
a certified high net worth individual and which relate to certain investments.
These investments may shares in or debentures or alternative debentures of an
unlisted company.
A certified high net worth individual is an individual who has signed a statement in
the form prescribed in Part I (Statement for certified high net worth individuals) of
Schedule 5 to the Financial Promotion Order.
This requires the individual to certify that he has earned at least £100,000 or have
held net assets to the value of more than £250,000 throughout the financial year
before the date of the certificate.
For the exemption to apply, the certificate must have been signed within twelve
months of the date on which the communication is made. The validity of the
statement is not affected by a defect in its wording or form provided the defect does
not alter its meaning or involve failure to place certain paragraphs in bold.
FCA guidance on certified high net wealth individuals
FCA guidance at PERG 8.14.24 G to the effect that a person seeking to
make a financial promotion to another person may wish to make
enquiries of that person to establish whether he is certified
In the FCA’s view, a communication which is merely an enquiry
seeking to establish that a person holds a current certificate will not
itself be an inducement or invitation. Once it has been established that
the person qualifies as a certified high net worth individual financial
promotions about the controlled investments.
The exemption of invitation and inducements made to
sophisticated investors
The other exemption to section 21 FSMA which may be relevant to TAL
is the exemption which allows financial promotions to sophisticated
Again, the terms of the exemption are detailed. In fact Article 50 relates
to two different types of sophisticated investors:
those certified by an authorised person, and
those that are self-certified.
Article 50 (Sophisticated investors)) applies to persons who are
certified by an authorised person and to a broad range of specified
Article 50A (Self-certified sophisticated investors)) is similar to the
exemption for certified high net worth individuals and applies where
the investor has self-certified himself and to a narrower range of
specified investments.
This exemption also requires that certain warnings are given to the
potential investor regarding risks.
In this respect, article 50(3) (d) provides that the financial promotion
must state that there is a significant risk of losing all monies invested
or of incurring additional liability. This is a mandatory requirement.
Share offerings made to the public for investments in
companies will generally need an FCA approved prospectus to
be lawful.
Invitations or inducements to invest in unauthorised investment
activities will probably be unlawful.
Exceptions to both rules exist for invitations to sophisticated
investors and high net wealth individuals.
Seconded to a “Technical Specialist” role at the Legal Department,
Enforcement Division, FCA 2012
“A highly skilled barrister who is incredibly good in front of jury”
“clients praised his commercial awareness”
“one of the few counsel recommended for proceeds of crime work outside
of London”
Contact us:
[email protected]
St Philips Chambers
55 Temple Row
Birmingham, B2 5LS
41 Park Square
Leeds, LS1 2NP
9 Gower Street
London, WC1E 6HB
Birmingham Tel: 0121 246 7000
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