In summary, the final rules:
1. allow the marketing of speculative illiquid securities to retail investors only when they are classified as:
a. certified sophisticated investors, or
b. certified high-net worth investors and self-certified sophisticated investors, where the product has been pre-assessed as likely to be suitable for a particular investor; and
2. require any marketing material produced or approved by an authorised firm to include a specific risk warning, and disclosures of any costs or payments to third parties that are deducted from the money raised from investors.
Broadly, “speculative illiquid securities” are debentures or preference shares with a denomination or minimum investment of £100,000 or less, which have been issued, or are to be issued, in circumstances where the issuer or a member of the issuer’s group uses, will use or purports to use some or all of the proceeds of the issue directly or indirectly for one or more of the following:
1. the provision of loans or finance to any person other than a member of the issuer’s group;
2. buying or acquiring investments (whether they are to be held directly or indirectly);
3. buying property or an interest in property (whether it is to be held directly or indirectly);
4. paying for or funding the construction of property.
For a more detailed description of the temporary rules and the FCA’s rationale for the introduction of the ban, please see our article from November 2019.
What are the changes from the temporary rules?
The FCA has published Policy Statement PS20/15, which summarises the feedback that the FCA received to the consultation and outlines the differences between the temporary and the final rules, including:
1. that listed securities which are not regularly traded fall into the definition of “speculative illiquid securities” and can therefore be subject to marketing restrictions. (This is in response to the FCA’s finding that listed and unlisted “speculative illiquid securities” pose similar risks, and that admission to listing alone is not enough to mitigate those risks);
2. in response to consultation feedback, the FCA has clarified the exemption that relates to SPV structures that are comparable to an investment in a single company, by confirming that this exemption is deliberately narrow and only applies where the issuer of a security can only make an investment in a single underlying company. This gives effect to the FCA’s intention that this exemption only applies where an investment gives an investor a “look-through” exposure to a single underlying company;
3. in order to give effect to the FCA’s intentions when introducing the restrictions, the rules have been amended to clarify the following:
a. securities issued in order to fund ordinary non-speculative business activity are exempted from the restriction on marketing. This exemption does not apply where the business activity in question is buying or funding property construction, and further guidance to clarify the scope of “general commercial or industrial purpose” has been included in COBS 4.14.26 G;
b. the definition of “property holding vehicle” has been amended to clarify that the single-property holding vehicle exemption applies where the issuer of a security is only engaged with the holding of income generating property and associated activities, for example the collection of rent. The FCA considers that this precludes issuers from using this exemption where it plans future development of an existing income generating property;
c. the FCA rules will be amended to clarify that the use of proceeds of an issuance to buy securities as part of a firm’s ordinary cash management or treasury activities will not bring the issuance of a particular security within the scope of the marketing restrictions.
Who will the ban affect?
As with the temporary rules, the FCA considers that the restrictions will affect:
- issuers of speculative illiquid securities;
- authorised firms that approve or communicate financial promotions relating to speculative illiquid securities; and
- firms offering services in relation to these products – for example, investment advice, arranging deals in investments, dealing in investments on behalf of clients, companies receiving funding from issuers of speculative illiquid securities, and law firms and other professional service providers to issuers or firms.
The final rules will apply from 1 January 2021 onwards. The amendments to the rules described above will amend chapter 4.14 of the Conduct of Business Sourcebook in the FCA Handbook. On top of their application of the temporary ban already in place, firms should take note of the amendments and clarifications made by the FCA and consider whether any changes to their business are necessary in order to comply.
Alongside the introduction of these rules, the FCA has said that it is currently reviewing feedback to its recent Call for Input on the consumer investments market, and how it can be improved to protect consumers from harm. It has also made clear that online platforms play an increasingly significant role in communicating financial promotions to consumers, and that these firms need to do more to stamp out fraud and misleading adverts, and bear legal liability for the financial promotions they highlight.
Article co-authored by Edward Longden.