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How to navigate financial services regs on early stage investing

How to navigate financial services regs on early stage investing

1 December 2020|Business Growth, Investing, Legals & Compliance, Money

How to navigate financial services regs on early stage investing
How to navigate financial services regs on early stage investing

By Oliver Woolley.   Most of us won’t find the the idea of getting a grip on financial services regulation a titillating one, it is essential. Those who avoid this will find themselves at the mercy of the regulatory body, the Financial Conduct Authority (FCA), which has a well-earned reputation for cracking the whip.

Rules, guidelines, exclusions and exemptions; financial services regulation is notoriously complicated. The handbook designed to distil the regulation itself makes the Fifty Shades series look like a short story, with the glossary accounting for 583 pages on its own.  

This complexity has created a spectrum of grey areas and led to wide-spread issues in the early-stage investment space with many unauthorised organisations conducting regulated activities, either unaware they are doing so or under the belief that they are somehow exempt.

And while it’s easy to get tied up trying to decipher the definitions, rules, exemptions and exclusions, I hope this article will ease the pain, take off the blindfold and help you dominate when it comes to financial services regulation.

So, here we expose the naked truth when it comes to the most common grey areas surrounding financial services regulation in early stage investing.

Grey area #1: I am not regulated, so I don’t need to worry about it.

This is a bit like saying, ‘I don’t have a license to drive, so the highway code doesn’t apply to me,’ and yet it is a real misconception in the market. 

If you are an unregulated network or introducer you can be reported to the FCA. If you are found to be undertaking regulatory activity, e.g. “arranging”  deals in investments, without the required FCA permissions, it is a criminal offence and the individuals responsible for operating the unregulated network won’t just get a gentle slap on the wrist, they might find themselves in handcuffs. If that isn’t bad enough, any transactions could also be unwound, and you could have to pay damages.

Grey area #2: I am not giving advice to investors, so I don’t’ need to be regulated. 

This is a common interpretation we hear from angel networks and other organisations who help match start-ups and investors. The grey area here is around the word ‘advice’ and how you’re actually interacting with both investors and start-up companies. 

Let’s have a look at the term ‘advising’ and what it means from a regulatory perspective. When we’re talking about equity investment, ‘advising’ falls into two categories:

o Advising companies about raising investment i.e. providing corporate finance advice to start-ups with regards to matters such as valuation and deal structuring and 

o Advising investors about investing i.e. providing recommendations in respect of making investments. 

The definition of investment advice is quite broad, so if you’re running an investment network and you’re not saying to investors, ‘put your money in this deal’ you’re in the clear, right? 


While you may not be carrying on the regulated activity of providing investment advice to investors, you may be carrying on a different regulated activity: arranging deals in investments.

Arranging is defined by the FCA as bringing about deals in investments, making arrangements, with a view to transactions in investments, or agreeing to carry on either of those regulated activities.

Here you can see an organisation that brings together investors and start-ups for the purposes of showcasing or discussing investment opportunities that will lead to transaction, is very likely carrying on the regulated activity of ‘arranging’.  

However, there are certain exclusions and exemptions which could apply, so you should obtain advice to confirm your exact regulatory position.

Grey area #3: Anyone can run a pitching event to help start-ups

Yes, anyone can arrange a pitching event. But. But. But. . .

There are several caveats here that you need to be aware of before you start sending out invites.

You must ensure that the investors you invite are at the right kind of investors. The right kind of investors are the kind with money, right? 

Not exactly, because, any marketing which is capable of having an effect in the UK, which involves an invitation or inducement to engage in investment activity, would fall within the scope of the UK financial promotion regime. Similar to regulated activities, breach of financial promotion is a criminal offence, transactions could be unwound, and you could have to pay damages. 

To avoid getting yourself in a bind, ensure any financial promotions are:

(a) issued by an FCA-authorised person;

(b) approved by an FCA-authorised person; or

(c) fall within an exemption from the financial promotion regime.

Grey Area #4: I am only targeting high net worth individuals, so I don’t need to be regulated

There are exemptions that apply to certain classifications of investors and rules around how you can market and interact with each.

One such a class of investors is called ‘Certified High Net Worth Individuals (HNWI),’ who have signed a HNWI statement within the last 12 months.  If you request a copy of the HNWI certificate for each person, then you know that your audience is HNWIs and falls within this exemption. However, you still have to be extremely cautious not to move beyond making a financial promotion, into the regulated activity of arranging either before or after your event. The exemptions that apply to the financial promotion regime do not generally apply to regulated arranging.

It is not uncommon for networks, post marketing, to help seal the deal by facilitating communication between the start-up and the investor. This is exactly the kind of behaviour that is likely to amount to the regulated activity of arranging and arouse the interest of the FCA.

Grey area #5: I can promote my equity investment opportunity on social media  

Posting your investment opportunity on your website, via your social media or targeting investors via LinkedIn is likely to fall within the financial promotion regime and will leave you open to scrutiny by the FCA. Breach of the financial promotion regime is a criminal offence and transactions could be unwound and you could have to pay damages. 

As stated above, under Section 21 of Financial Services and Markets Act 2000 (“FSMA” – a tortuous but important bit of legislation protecting investors), any communication which invites someone to buy shares in their company is a financial promotion and, unless you are confident the communication is exempt or has been approved by a FCA registered firm, it is a criminal offence to make such a communication.

If that hasn’t turned you off, section 755 of the Companies Act 2006 prohibits private companies offering shares to the public, unless various conditions are met, such as making the offer to fewer than 150 people or to qualified professional investors. 

To be sure you are not breaching any of these regulations, you may wish to consider two things:

1. In relation to the financial promotion regime, ensuring any financial promotions fall within an exemption or have been signed off by a FCA authorised firm and…

2. In relation to arranging, ensuring that all investment transactions are arranged through an investment platform which is managed by an FCA authorised firm with permission for arranging, which will also ensure investors go through a proper investor classification and risk awareness process.

These are just a handful of the most common misconceptions that we see. If you feel like you’re groping in the dark when it comes to regulation, there are firms out there that can help. In addition to consulting with a specialist lawyer, regulated firms like Envestors are able to offer Introducer and Appointed Representative status —giving you more than ample cover without having to swallow the cost of becoming regulated in your own right. 

It is time for networks working in the exciting world of matching start-ups with investors to take off their blindfolds and submit to regulatory requirements. When this happens and all the players have confidence that investors are fully aware of risks, and importantly that opportunities are ‘clear, fair and not misleading,’ it will mean more money is pumped into start-ups, which desperately need a leg up in these challenging times.

The risks involved in misinterpreting the rules will never outweigh the benefits. With regulation, the safe word should always be compliance.


Oliver Woolley, CEO of Envestors.  Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK. The company partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks. Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through our own private investment club.  Envestors is authorised and regulated by the Financial Conduct Authority.

Web: https://www.envestors.co.uk/ 

LinkedIn: https://www.linkedin.com/company/envestors-llp/ 

Twitter: @EnvestorsLondon