Styperson POPE

Strategy & Compliance for Investment Firms


Raising Funds under Prospectus Directive Exemptions

The Prospectus Directive is EU legislation requiring companies and funds structured as unregulated collective investment schemes to prepare a prospectus when they offer transferable securities to the public (raise money!). Within the UK, the prospectus directive has been made law through certain sections of the Financial Services & Markets Act, through Treasury Orders, and through the FSA’s ‘Prospectus Rules’. These lay out the circumstances in which a prospectus is needed and also define what it must contain.

The advantage of preparing a prospectus is that it can be used across European countries with relatively few alterations. The disadvantages are that it is time consuming and expensive to create a prospectus, it is likely to involve professional advisors, and it must be approved by the FSA. For most smaller companies and funds looking to raise money, a full prospectus is an unnecessary complication. For this reason, there are various exemptions to the prospectus rules and so the requirement to prepare a prospectus does not apply to (among other things):

1. “open-ended” funds;
2. funds or companies raising less than €2,500,000 or equivalent;
3. funds or companies using a minimum total consideration per investor of €50,000; or
4. funds or companies issuing fewer than 100 offers (per EEA member state)

Less than €2,500,000
If the fundraising is for less than €2.5m, it is exempt from the requirement to prepare a prospectus, however the fundraising total must include any other amounts raised in the preceeding 12 months. For example, if a fund or company is looking to raise €2m having raised €1m six months earlier, it is unlikely that they can rely on this exemption.

Minimum Investment of €50k
If the fund or company will not accept an investment of less than €50k from any investor, it is exempt from the requirement to prepare a prospectus. It will be necessary to ensure that this lower limit is not breached because that would mean that the entire fundraising would become subject to the prospectus rules and the issuer of the security, along with the person who makes the offer on their behalf will be responsible for providing a satisfactory prospectus.

Restricted to fewer than 100 offers
If fewer than 100 potential investors receive an offer, the fund or company is exempt from the requirement to prepare a prospectus. It is not relevant from whom the approach comes, whether directly from the company or through any other route and it is the total number of end recipients which must be counted.

Investors can be excluded from the total if, at the time of the approach, they were a Qualified Investor registered with the FSA, an authorised person, or a High Net Worth Company (as defined by the FSA and EU rules).

Other Vehicles
It should be noted that the the Prospectus Rules apply to closed-ended funds and certain other vehicles like partnerships and companies. If another vehicle is used, different rules may apply. For instance, a open-ended fund is likely to fall outside the Prospectus Directive but will still be governed by the rules applying to Unregulated Collective Investment Schemes, Financial Promotions and Regulated Activity.

With experience of the prospectus directive within both corporate finance and fund establishment, StypersonPOPE can help you plan which exemptions to use. For an initial discussion, please call or e-mail Simon Webber, StypersonPOPE‘s Managing Director.


Planning a Fund

At an early stage of planning a fund (especially if it’s going to end up as an unregulated collective investment scheme) it is vital to balance the regulatory, legal, commercial and marketing aspects of what you want to acheive.  Often initial discussions are with solicitors or with the FSA directly and, unfortunately, they often don’t provide the kind of strategic overview that is needed.

As we hope you have seen from this site, StypersonPOPE isn’t in the business of making things seem unnecessarily complicated (for instance, you may find it helpful to read our articles on Fund Structures and Routes to Promoting a Fund). 

To simplify things further, we now suggest an agenda for a ‘Fund Planning’ meeting.

  • We need to understand your plans;
  • we need to understand the fund’s stage of development;
  • we need to understand the advice you’ve received already;
  • we will give a full picture of the compliance landscape;
  • we will discuss the most appropiate reguatory option for you;
  • we will discuss the routes to market available to the fund;
  • we will advise on the next steps; and
  • we will make introductions to suitable contacts.

We won’t be watching the clock but, from experience, we expect the meeting to take around an hour and a half.  We will follow the meeting with a written note of what we have discussed and further clarification of anything which remains unclear.

If you’d like to get together for a discussion, please  contact StypersonPOPE‘s Managing Director,  Simon Webber, on sw@strategic-compliance.co.uk or +44 (0) 7710 260 717.


Promotion of Unregulated Collective Investment Schemes

As with most types of financial services, people who are not authorised and regulated by the FSA are very restricted in how they can promote an unregulated collective investment scheme.  Unusually even regulated firms are subject to tight restrictions.  The Financial Services and Markets Act 2000 (let’s just call it FSMA), makes it an offence for anyone to promote a scheme to the public:

“An authorised person must not communicate an invitation or inducement to participate in a collective investment scheme.”

Fortunately, for regulated firms, there are a few exemptions, one set is created by Treasury Order and the other by the FSA.

Treasury Exemptions
If an investor falls into one of the categories below, a fund can be promoted to them but the promoter must ensure that the investor falls into the category before making a promotion:

  • Investment Professionals (authorised firms and investment companies);
  • Sophisticated Investors with a certificate signed by an authorised firm covering unregulated schemes; and

  • High Net Worth Companies and Unincorporated Associations.

For some schemes that invest in unlisted securities, authorised firms can also invite High Net Worth Individuals and Sophisticated Investors to self-certify.

FSA Rules
These allow a scheme to be promoted to investors who have undergone an assessment by an authorised firm, including:

  • individuals for whom the scheme has been assessed as suitable (usually by a financial advisor); and

  • individuals for whom an assessment of experience, expertise and knowledge has been undertaken (sometimes by a financial advisor or the scheme’s Operator).

In these cases, a fund can be promoted to a potential investor on the basis that they will be prevented from investing unless they successfully complete the assessment (which may occur after the promotion has been made).

Whichever exemption the investors fall into, the documents for the scheme must meet detailed requirements laid down by FSMA, the Treasury and the FSA. These include presenting a balance of risk and reward, carrying appropriate warnings, giving sufficient information, and always being clear, fair and not misleading.  Summary documents can be used but these also have to meet the rules and must be consistent with all of the other information given to investors.

In most cases, an FSA authorised firm can approve the scheme documents and summaries for distribution by an unauthorised person but only to the relevant categories of exempt investor.  To rely on the FSA’s exemptions, careful procedures will need to be followed by the authorised firms (see our Services For Operators).

If you would like to discuss your plans to market an unregulated collective investment scheme, please contact Simon Webber, StypersonPOPE’s Managing Director, on 07710 260 717 or sw@strategic-compliance.co.uk.

 

 


Data Security in Authorised Firms

In 2008, the FSA made “Data Security” one of their priorities and although they do not lay down rules specific to data security, they expect authorised firms to take it extremely seriously as part of their commitment to establishing effective management systems and controls, and their obligation to treat customers fairly.

The risk of damage to a firm’s reputation and the cost of dealing with lost or stolen client information is bad enough but worse still is the danger that clients may be exposed to identity theft. Even small financial services firms which hold limited data on clients can be targeted by organised criminals or casual opportunists. The greatest threat often comes from the firm’s own staff; database encryption and secure servers are pointless if somebody can take client information away from the office on a CD or accidentally leave their laptop on a train.

The first step in establishing data security, is a performing a risk assessment specific to your business. The advice from the FSA is that:

“If firms think their in-house resources or expertise are inadequate to perform an effective risk assessment, they should consider seeking external guidance.”

Once completed, the risk assessment becomes the foundations on which proper policies and business-specific procedures can be built.

“We were not convinced by firms that claimed to have detailed data security rules but were unable to produce written policies and procedures”

Of course written policies are pointless if staff are not appropriately trained in their use. Because many people wrongly assume that data security is common sense (and because, let’s face it, it’s not a subject naturally dripping with drama), it is important to be creative.

“Our experience shows that many instances of data loss occur because staff do not know or understand relevant policies and procedures.”

Of course, we hope that risk assessments, appropriate procedures and effective training will prevent data loss or theft but if the worst happens, firms must decide how to react and this will probably involve advising those affected, something which must be done carefully but swiftly.

“Firms should consider telling affected consumers exactly what data has been lost, give them an assessment of the risk and give advice and assistance to consumers at a heightened risk of identity fraud.”

For a business-specific risk assessment, help creating suitable procedures, and some effective training on data security, do please give us a call or send us an e-mail.


Working In A Regulated Environment

“The rain, it raineth on the just and also on the unjust fella;
but chiefly on the just, because the unjust steals the just’s umbrella.”
Sam Ervin – US Senator 1954 – 1974 

It would undoubtedly be easier to make money if we chose not to follow the increasing number of regulations to which we are subject.  After all, it’s probably more profitable to rob a bank than to run one.

However, as we offer compliance advice (as opposed to non-compliance advice) we feel the real trick is knowing how to make the most of what can be acheived within the regulations. 

It’s vital not to see the compliance function as a brake on enterprise; it must be a partner in the firm’s strategic development; if it’s not, then you need to review your compliance function urgently.

If you would like to discuss any aspects of strategic compliance advice, please call or e-mail us.


Anti-Money Laundering

All FSA-authorised firms are required to ensure that their businesses are not used to facilitate financial crime.  Since December 2007, many unregulated companies have joined them, becoming responsible to other regulators including HMRC and the Office of Fair Trading (OFT).

The Joint Money Laundering Steering Group (JMLSG), part of the British Bankers’ Association (BBA), has devised rules for all of these businesses to follow in their anti-money laundering efforts.  Because of our familiarity with these rules, we can prepare appropriate procedures based on your business’ exposure to the risk of financial crime.  We can tailor these to fit your existing business processes and ensure that they are easily understood, implemented and overseen.

We are able to offer the services of an FSA and HMRC-approved Money Laundering Reporting Officer who can oversee the processes we implement and report to your Board, SOCA or you relevant authority as required. 

If you would like to discuss any aspects of money laundering reporting, please call or e-mail Simon Webber, our Managing Director.


Promoting an unregulated collective investment scheme

IFAs are not the only route. 
“Unregulated Collective Investment Scheme” (UCIS) is something of a misnomer.  Far from being unregulated, the FSA restrict these schemes very tightly indeed – for funds structured as a UCIS, there is a simple edict:

Such schemes cannot be marketed to the general public and are otherwise restricted in their promotion.

As a result, the promotion of unregulated collective investment schemes, must be carried out very carefully and only to selected groups of investors.  Often the only route considered is through IFAs but in fact any authorised firm, and even unauthorised firms, can promote a UCIS as long as the approach is planned carefully and carried out correctly.

Summary Documents
For the sake of making the fund more attractive to investors, the detail of the information memorandum (IM) needs to be distilled, summarised and presented in a more user-friendly, marketing-led form.  Although secondary to the IM, this document must still meet the stringent demands of the FSA.  We produce summary documents, ensuring compliance, and with marketing expertise on hand, as well as design and print facilities, we can offer a full service if required.

Alternative Routes to Market
For some funds, IFAs may not be the best (or at least the only) route to market and with our assistance, General Partners, Managers, Advisers, and Promoters of such schemes can negotiate a marketing plan with their Operators, draft documents and produce a set of procedures which allows them to engage with individual investors under specific exemptions to the rules.