8 January 2016 by Vincent Billings

New Year, New Business Investment – The Internet Dimension

Businesses looking for investors might think that the internet and/or social media provide an efficient way of reaching a wide audience. But before setting off on their search, they must be aware of the very serious consequences that may arise if seeking investment in this way – otherwise known as ‘financial promotion’ – is mishandled.

The law regarding ’financial promotion’ is set out in the Financial Services and Markets Act 2000 (FSMA) which provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless the promotion (i) has been made or approved by an authorised person (that is, a person or business that is authorised by the Financial Conduct Authority) or (ii) falls within one of the statutory exemptions (of which there are a number). This is known as the “financial promotion restriction” and its purpose is to protect consumers.

On the face of it, the financial promotion restriction is very wide and may be a concern for businesses that are currently looking for investors via the internet or social media. When examined closely, it also brings into play complex, multi-layered legislation which is likely to catch out many businesses who do not take legal advice in advance.

The consequences of breaching the financial promotion restriction can be severe and may include compensation claims, fines being imposed against the business and/or the directors, and potentially even criminal sanctions for the individuals involved.

In a recent matter, we successfully persuaded the Financial Conduct Authority that no sanctions should apply in circumstances where the financial promotion restriction may have been breached by our client. However, this will not always be possible, and it is prudent to consider all available options before deciding where and how to search for prospective investors for your business.

A different approach may be to advertise on crowdfunding websites, which offer an alternative way of raising investment which is less likely to offend the financial promotion restriction.  However, each crowdfunding site differs in its approach to raising money. Some crowdfunding sites offer donation-based, pre-payment or rewards-based funding which are not (currently) regulated by the FCA, whereas other such sites offer loan-based or investment-based funding which are regulated by the FCA.

So crowdfunding sites can be a useful way to promote investment in your business, but even then there may be important regulatory issues to consider.  You should therefore always obtain legal advice, at an early stage, to ensure that your business (or your investment) is protected.

If you are thinking of raising money for your business, or you are thinking of investing in a business, please contact us on 0207 288 4700 or email us at info@boltburdon.co.uk

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