FINANCIAL PROMOTION - A CONSULTATION DOCUMENT

MARCH 1999

Preface

Part 1: Overview

Part 2: Territorial scope and financial promotions on the internet

Part 3: Proposed new exemptions

Part 4: Proposed approach to current exemptions

Part 5: Informal capital raising

Annex A

PREFACE

This Consultation Document seeks views on the Government's proposed approach to financial promotions under the draft Financial Services and Markets Bill.

The draft Financial Services and Markets Bill reforming the regulatory system for financial services was published last Summer for consultation(1). It establishes the principal framework for modernising and rationalising the regulatory system for financial services. The Government has welcomed the very constructive and extensive response to the draft Bill, and is also consulting on the key pieces of secondary legislation to be made under it.

The draft Bill replaces the existing regulatory regimes for investment advertisements and unsolicited calls with a unified prohibition on financial promotions made by unauthorised persons. One of the key pieces of secondary legislation will be the Order concerning exemptions from the basic prohibition on making financial promotions which is contained in the draft Bill.

The modernisation of the financial promotion regime is clearly very important to both firms and consumers. Given its importance, the Government has decided to consult in two stages. First, this Consultation Document sets out the broad approach which the Government proposes to adopt in preparing the draft Order containing exemptions from the prohibition on financial promotion by unauthorised persons. Comments are invited on the proposed approach and the issues raised in this Document. Second, and following consideration of the responses to be received, we will publish for consultation the draft Financial Promotion Exemptions Order. Further, detailed, comments will be invited on the draft legislation at that stage. We believe that this two stage process will result in a more fully considered approach to the proposed new financial promotion regime and the exemptions from it.

The Financial Promotion Exemptions Order will not be made until the Government is ready to bring the Bill into force next year. However, we expect the draft Order to form an important background to the passage of the Bill.

This Consultation Document is in five Parts.

Part One contains an overview of the current financial promotion regime and a brief summary of the principal changes proposed by the Bill. It also outlines the comments relating to financial promotion which were received in response to the July 1998 Consultation Document accompanying the draft Bill.

Part Two sets out for comment the proposed territorial scope of the new financial promotion regime and its application to the Internet and other media.

Part Three sets out our proposed approach to new exemptions.

Part Four refers to various current exemptions from the investment advertising and cold calling regimes and seeks views on their continuation or modification under the new regime.

Part 5 sets out proposals for an exemption to permit unapproved investment advertisements to be issued to certain categories of investor, so-called "business angels".

Annex A sets out in tabular form a summary of certain key aspects of the present and proposed financial promotions regimes.

We welcome comments on the proposed approach and issues raised in this Consultation Document. We would also welcome comments on the costs associated with obtaining approval for investment promotions in various circumstances, along with views as to the anticipated costs of the new proposals as they affect may affect consumers or firms. Responses should be sent to the address below by 30 April 1999.

Regulatory Reform Team H M Treasury Parliament Street LONDON SW1P 3AG

Respondents should give details of any organisation whose views they represent. In addition, unless respondents indicate to the contrary, it will be assumed that they have no objection to their response being published.

Paper copies of this document are available, free of charge, by telephoning 0171 270 4848. © Crown copyright reserved

PART ONE - OVERVIEW

1. Introduction

2. Current regime applying to financial promotions

3. The proposed regime under the Financial Services and Markets Bill

4. Responses to the July 1998 Consultation document

1. Introduction

1.1 The new financial promotion regime proposed in the draft Financial Services and Markets Bill seeks to rationalise and modernise the legislative framework currently applying to investment promotions in the UK. There are at present three broad legislative regimes concerning advertisements and marketing of deposits, insurance and financial services(2), and whilst these separate regimes will be consolidated under the draft Financial Services and Markets Bill, it is not the Government's intention fundamentally to change the substance of the exemptions currently applying to financial promotions under the existing legislation. However, consistent with its approach to regulatory reform as a whole, the Government will seek to avoid unnecessary regulation.

1.2 The Government will also seek to clarify and rationalise the application of certain of the exemptions under the Financial Services Act 1986. These have become increasingly complex over time, presenting firms with difficulties in interpreting and applying the relevant legislation. This is discussed further in Part Four of this Document.

1.3 In considering its approach, the Government has also focussed on how to address questions posed by recent developments in technology, such as the advent and increasing use of the Internet, scripted messages and multi-media communications. These have put the existing regulatory framework under some pressure, requiring ever more strained interpretations of the current legislation in order to keep pace with the changes in technology affecting the financial services industry in the UK. Accordingly, one of the Government's main aims for the new financial promotion regime is to avoid, as far as possible, discriminating between different communications media, and also to ensure that the legislation is sufficiently flexible to adapt to further technological changes.

1.4 This Document considers the exemptions from promotions relating to "controlled activities" under Clause 18 of the draft Bill. These are essentially activities which fall to be regulated (and are not excluded) under the draft Bill(3). Although controlled activities will include deposit-taking and general insurance activities, it is not intended that the regulation of promotions relating to deposits and general insurance are to be treated in the same way as promotions of other investments such as shares or debentures. Accordingly, a separate discussion of the proposals relating to deposit and general insurance advertisements is set out in Part Four. The remainder of this Document focusses on investment activities which are currently subject to the basic investment advertisement and cold calling prohibitions contained in the Financial Services Act(4).

2. Current Regime Applying to Financial Promotions

2.1 The Financial Services Act currently permits three types of investment advertisements: advertisements issued by an authorised person (subject to any rules which the Financial Services Authority (FSA) or Self Regulatory Organisations (SROs) make to ensure that the advertisements are fair and not misleading); advertisements issued by an unauthorised person but approved by an authorised person; and advertisements issued by an unauthorised person but which benefit from a relevant exemption.

2.2 It is a criminal offence for an unauthorised person to issue an unapproved investment advertisement unless the advertisement falls within an exemption made under the Financial Services Act. In addition, contracts entered into as a result of an unapproved advertisement which does not also fall within an exemption are not generally enforceable against the customer. Exemptions for investment advertisements issued by unauthorised persons are set out in the Financial Services Act and in various subsequent Orders made by the Treasury(5).

2.3 The Financial Services Act also prevents dealing in the course of, or in consequence of, an unsolicited call (a telephone call or personal visit made without express invitation) and provides that investment agreements entered into as a result of an unsolicited call are unenforceable against the customer. This prohibition on "cold calling" applies equally to both authorised and unauthorised persons. Exemptions from this prohibition are set out in Regulations made by the FSA which also apply to authorised and unauthorised persons(6). There are at present no restrictions on solicited calls made by unauthorised persons, except where those communications are of such a nature that they might also be considered an advertisement.

3. The Proposed Regime Under the Financial Services and Markets Bill

3.1 The regime proposed by the Bill will maintain the current distinction applying to issues of investment advertisements by authorised and unauthorised persons. It will also maintain the criminal offence of unauthorised persons advertising investments without the approval of an authorised person.

3.2 However, the new regime will contain several significant changes:

All of the exemptions from the prohibition on financial promotions by unauthorised persons will be made by the Treasury. - All of the rules relating to financial promotions by authorised persons will be made by the FSA. There will no longer be any regulations made by the FSA which will apply to both authorised and unauthorised persons, in the manner of the current Common Unsolicited Calls Regulations.
The new prohibition on financial promotion (and the Treasury power to make exemptions from the prohibition) no longer uses the categories of advertisement and unsolicited call. The basic prohibition on financial promotion therefore includes solicited calls and promotions which might not currently be caught. This removes an anomaly under the existing regime whereby solicited calls, which may be potentially no less harmful than unsolicited calls, are allowed to be made without restriction, whereas unsolicited calls are not.
The new regime will make breaches of the financial promotion prohibition by unauthorised persons through any medium a criminal offence.

3.3 As indicated above, the present regime for the regulation of investment advertisements and cold calling has been put under increasing pressure through technological developments. The proposed Financial Promotion Exemptions Order will seek to tackle challenges raised by advances in technology, including the growing use of the Internet and this is discussed further in Part Two.

3.4 The draft Bill contains a power for the Treasury to impose limitations on the FSA's ability to make rules on financial promotions by authorised persons (Clause 76(3)). This power is intended primarily to enable the Treasury to limit the FSA's ability to make rules on the promotion by authorised persons of investments such as deposits or general insurance in appropriate circumstances. In these instances, it is intended that the FSA will only be able to make rules requiring certain disclosures to be made and also rules prohibiting authorised persons from describing their FSA authorisation in misleading terms.

3.5 There are currently a number of European legislative initiatives which may have an impact on the regulation of financial promotions in the UK, in particular, the draft Directives on the Distance Marketing of Consumer Financial Services and on Electronic Commerce. The former proposes rights for consumers (such as a right of reflection and withdrawal) and also contains provisions related to unsolicited communications and services. The latter proposes to reduce legal barriers to electronic commerce by adopting the "country of origin" or "home state"regulatory principle. The objective is generally that where the activities of the party providing the service comply with the national law of the Member State in which they are established, other Member States would not be able to restrict or hamper the provision of the service on their own territory. There are a number of exceptions to the principle (and, for example, the regulation of collective investment schemes and insurance are not covered by the proposals).

3.6 The proposed European legislative initiatives may, in the future, have an impact on the regulation of financial promotions within the UK, including, for example, on the questions of territoriality posed by the Internet and outlined in Part Two of this Document. The approach to be taken in respect of the Financial Services and Markets Bill will be to develop a regime which is capable of adopting European and international developments on the regulation of financial promotions.

4. Responses to the July 1998 Consultation Document accompanying the Financial Services and Markets Bill

4.1 The Government has welcomed the comments made by consultation respondents and is considering them carefully in preparing the draft Financial Promotion Exemptions Order and revisions to the draft Bill. Points raised in consultation included the following:

Modernisation. Many respondents welcomed in principle the consolidation of the existing provisions and the attempt to "future proof" the legislation by covering new forms of technology.
Territorial scope of the financial promotion regime. There was widespread support for the proposal to exclude promotions not directed at persons in the UK. There was also comment on the outward scope of the financial promotion regime (that is, in respect of promotions being made by persons in the UK to persons outside the UK). This is discussed further in Part Two.
Personal Communications. Consultation responses to the Bill revealed concern as to the scope of the new regime and its apparent extension to what are essentially "personal" communications (for example, whether a casual dinner party conversation should or will be caught). Again, this is discussed further in Part Two.
Promotion or advertising. It was suggested by some respondents that a greater degree of promotional intent should be demonstrated before the financial promotion prohibition should apply: otherwise it was suggested that there could be a risk of the promotion regime applying to what are essentially statements of information or advice. We are considering this further.
Other. Various detailed points on the Bill were received and are under consideration. These included comments regarding the enforceability of contracts entered into in breach of the financial promotion prohibition.

PART TWO - TERRITORIAL SCOPE AND FINANCIAL PROMOTIONS ON THE INTERNET

1. Territorial scope of the financial promotion regime

2. Financial promotions on the internet

1. Territorial Scope of the Financial Promotion Regime

1.1 Under Clause 17 of the draft Bill, the territorial scope of the financial promotion regime is widely drawn. It relates to communications originating both inside and outside the UK, although in the latter case, only to communications which are "capable of having an effect" in the UK.

1.2 However, the Government considers it appropriate further to limit the basic scope of the legislation, to allow communications which, although they originate outside the UK and are capable of having an effect in the UK, are not directed at the UK.

1.3 As for regulating financial promotions made by persons in the UK to other countries, consultation respondents to the July 1998 Consultation Document pointed out that the proposed approach may represent a potential extension to the existing regime in respect of investment advertisements, although it is consistent with that currently applying to cold calls. We would welcome further views on the proposal to legislate for communications originating in the UK but sent overseas, and in particular, on the extent to which, in practice, this might impose additional and undesirable regulation and costs on UK persons, or have a detrimental effect on UK persons' competitive positions.

1.4 The principal benefits in applying the financial promotion restrictions to communications made overseas include the following:

Regulating financial promotions originating from the UK will help to maintain the highest confidence in the UK as a safe place to do business. The Government attaches the utmost importance to safeguarding the reputation of the UK as a financial centre, and this approach is evidenced by the fact that under the Bill, investment activities carried on or directed from a UK place of business (irrespective of where the counterparty is located) will generally need to be regulated. In view of the position regarding regulated activities carried on overseas, we consider that any increase in regulation or costs resulting from applying the financial promotion prohibition to overseas investment advertisements issued from the UK, is, in practice, likely to apply only to a very limited category of persons who, whilst they make financial promotions overseas, do not subsequently enter into investment agreements as a result.
Given the increasingly global nature of the financial services industry, international regulatory cooperation is playing an ever more significant role in promoting high standards of regulatory conduct and combatting financial crime. We believe that bringing within the UK regulatory net those promotions which originate in the UK but are issued overseas, will enable the UK fully to participate in matters requiring international regulatory co-operation and help to promote the quality of UK regulation in the international arena.
Applying high standards of UK or "home state" regulation of financial promotions may be attractive to UK-based firms which conduct cross-border European business, insofar as compliance with the UK's promotional rules is recognised in other European jurisdictions. This is broadly consistent with current regulatory proposals concerning the adoption of home state regulation in Europe and internationally. However, we note that in the more immediate term, particularly with regard to non-European jurisdictions, imposition of UK financial promotion requirements might in fact impose on UK persons an additional layer of promotional requirements which will need to be complied with.

1.5 In considering these points, we would ask consultation respondents to consider the extent to which, if the proposed territorial scope of the promotion regime were to be more narrowly drawn, it would be appropriate to permit cold calls to be made from the UK to persons overseas, without restriction. Respondents' views are also welcomed on the extent to which other forms of protection in respect of, say, misleading advertisements (such as the criminal offence of making misleading statements contained in Clause 212 of the draft Bill) might be regarded as offering adequate, alternative protection in the case of financial promotions issued from the UK to other countries.

2. Financial promotions on the Internet

General

2.1 UK and overseas persons are increasingly using the Internet as a commercial market, including in the area of financial services. The Internet is a network of tens of thousands of computer networks. Whilst its origins can be traced to a communication programme by the US Department of Defence in the 1960s, there are now estimated to be tens of millions of Internet users worldwide and continuing rapid growth in numbers is projected. Different applications on the Internet include the World Wide Web, e-mail, Bulletin Boards, Chat Rooms, Search Engines and Intelligent Agents. Sites can be interactive or non-interactive and can range from being purely for information on one hand, to providing fully on-line transactions, on the other.

2.2 The potential advantages the Internet offers in terms of low cost dissemination of large volumes of communications world wide and the potential for new channels of advertising and product distribution are as apparent to businesses offering financial services (and companies seeking investors) as they are to retailers and advertisers of non-financial products.

2.3 The challenges for financial regulation in adjusting to the Internet are caused by just these advantages. Whilst e-mail, like traditional forms of mail, is sent to a particular recipient (and it does not therefore pose the same regulatory questions as Web sites which are accessible to multiple persons in several jurisdictions), Web pages are potentially accessible from any computer linked to the Internet. The result in the UK is that all promotions of financial services or share offers on the Web and accessible in the UK are potentially promotions made into the UK and therefore within the scope of the regulators' authority, although not necessarily within their effective control. Given that this situation is faced by regulators in other jurisdictions, firms which advertise on the Internet may be faced with the need to attempt to comply with multiple regulatory regimes.

2.4 Some of these challenges can only be addressed in the context of international cooperation between regulatory authorities. However in the context of the financial promotion regime under the Financial Services and Markets Bill, one of the key aims is to provide reasonable certainty about the scope of the regulation of financial promotions by the FSA.

Current Regulatory Approach

2.5 The effect of the current legislation is to bring within the scope of UK legislation all Internet communications which are issued in the UK. The current approach to the regulation of the promotion of financial services over the Internet by UK regulators under the Financial Services Act is therefore to assert jurisdiction over every Web site accessible in the UK containing advertisements relating to investments or investment services, but to adopt a general enforcement policy based on whether the particular investment advertisement raises UK investor protection concerns.

2.6 This approach is set out in more detail in the FSA's Guidance Release entitled "The treatment of material on overseas Internet World Wide Web sites accessible in the UK but not intended for investors in the UK", published in May 1998.

2.7 Under Section 57 of the Financial Services Act, investment advertisements issued or caused to be issued in the UK must normally either be issued or approved by an authorised person, unless an investment advertisement exemption applies. The FSA's view is that the Financial Services Act means that an advertisement which can be accessed on a computer screen by a person in the UK is issued in the UK. Accordingly, a very considerable amount of Internet material falls within the regulatory ambit of UK regulators.

2.8 However, the FSA's current enforcement policy is based on whether, in any particular circumstance, there are UK investor protection issues involved. The FSA will take enforcement action, where appropriate, against those responsible for the content of an Internet Web site. The Guidance Release indicates that the FSA does not view providers of technological infrastructure as responsible for the contents of a Web site where the provider has no commercial interest or control over the content.

2.9 In considering whether to take enforcement action against possible advertising contraventions, the FSA Guidance Release states that the regulator takes into account all relevant factors, and in particular, the following indicators:

whether the Web site is located in the UK.
the extent to which the underlying investment or investment service is available to UK investors who respond to the advertisement.
the extent to which the advertisement is directed at persons in the UK (including the nature of warnings and disclaimers, the nature of the content of the Web site in general and whether the Web site has been advertised in a UK publication).
the extent to which positive steps (such as effective control systems) have been taken to ensure that UK investors do not obtain the investment service as a result of an advertisement having been issued over the Internet.
the extent to which positive steps have been taken to limit access to the Web site (including by the use of passwords).

2.10 We consider there to be considerable benefits in adopting the FSA's approach of using indicators to determine the sorts of promotional activity being carried on in the UK. In particular, the FSA's targeted enforcement policy can respond rapidly to market conditions. However, drawing a wide regulatory net and relying solely on the regulator's enforcement policy to apply it has two main draw-backs: first, persons promoting investments or financial services into the UK by means of the Internet should, we believe, be entitled to a higher degree of certainty as to whether their activities fall foul of the UK legislation; and second, even if the FSA were not to take action in respect of a financial promotion on a Web site, there is still the risk that counterparties may, in certain circumstances, pursue a civil action, or alternatively, that other prosecuting authorities may nevertheless seek to pursue a criminal claim despite the FSA's decision not to enforce. The proposals set out below therefore seek to establish a more clearly defined regime in order to avoid some of the uncertainties inherent in the existing system.

Proposed New Approach

2.11 We propose that in order to clarify when financial promotions issued outside the UK should be caught by UK legislation, there should be an exemption from the financial promotion regime for promotions issued from overseas, which, although available in the UK, are not "directed at" the UK. The exemption should apply to protect persons from both a criminal prosecution in respect of an unapproved financial promotion, and a civil suit for unenforceability of an investment agreement entered into as a result of the unapproved promotion.

2.12 There are various ways in which the exemption could be framed. We would welcome comments on these in particular:

First, it would be possible to provide in secondary legislation that communications originating overseas but not directed at the UK would be exempt. "Directed at" would not be defined or amplified by reference to explanatory criteria, in order to allow maximum flexibility for the FSA to determine when a promotion should be caught (where what is at issue is the exercise of its powers). However, we do not favour this approach as we consider that it would not deliver a sufficient degree of certainty for persons issuing promotions into the UK.
Second, and at the other end of the spectrum, it would be possible to provide in secondary legislation that communications not directed at the UK are exempt, and then to define conclusively when a promotion will, or will not, be considered to be directed at the UK. This would most likely be achieved by setting out various indicators (discussed further below) which would state when a communication would not be regarded as being targeted at the UK and providing an absolute defence if a person could demonstrate that he fell within some or all of them. Whilst this approach delivers benefits in terms of certainty, we consider that a strict definition would not afford the FSA the flexibility it needs in pursuing undesirable communications in the face of constant technological change. Also, we believe that such an approach might be open to abuse by unscrupulous operators who could structure their operations in order to fall within the letter, but not the spirit, of the exemption.
Third, and our preferred approach, would be a combination of the two options outlined above. The legislation would provide an exemption for communications not directed at the UK, and then, in order to determine whether a communication was not directed at the UK, a list of indicators would apply. The indicators would not, however, be conclusive, but rather of evidential weight in determining whether a promotion had been directed at the UK. The legislation could provide that a Court shall have regard to compliance with one or more of the indicators in determining whether a promotion had not been directed at the UK, or alternatively, it could state that compliance with the indicators would of itself be an indication that a person had not directed a financial promotion at the UK. However the test is framed, it will be important to ensure that it is appropriately drawn to ensure that on one hand, promotions which ostensibly comply with the indicators (say, by including appropriate disclaimers) but which are none the less, in substance, directed at the UK, are to be caught, but on the other, that promotions which are not actually targeted at the UK, should not be, even if they do not actually comply with the various indicators.

2.13 One consequence of the proposed approach is that financial promotional material which is relevant to, and accessible by, UK investors will not be regulated by UK law if it is not also directed at UK investors. Accordingly, UK investors who visit overseas Web sites which promote stocks on various international securities markets might not be protected under UK law, even if the sites contained no disclaimers or indicators. However, without drawing the UK regulatory net unduly widely, this is a result which is very difficult to prevent. Indeed, even if the net were to be more widely drawn, as a practical matter, it would be equally difficult to enforce. This is already recognised by the FSA's current enforcement policy and also by the existing legislation which provides an exemption for investment advertisements in newspapers circulating principally outside the UK.

2.14 Similarly, if a UK investor were to ignore disclaimers or circumvent systems which were in place to prevent UK investors from accessing a particular promotion, they might be expected to lose UK regulatory protection under the new regime.

2.15 As well as providing an exemption for promotions not directed at the UK, we propose that Internet promotions which fall within another exemption from the basic financial promotion prohibition can be combined with other exemptions. So, for example, Internet promotions which are not generally directed at the UK, but are directed to UK professional, or expert, investors and which would fall within the proposed exemptions discussed at Part Four below, will, in principle, be permitted.

2.16 It is proposed that the exemption for financial promotions not directed at the UK will apply to all financial promotions in any media (including periodical publications and sound and television broadcasts as well as the Internet). However, financial promotions available in the UK but not targeted at the UK which are not part of the Internet or an electronic or other system replicating some of the characteristics of the Internet (such as for example, digital television), are likely to be non-interactive in nature, and it is possible that, although we are seeking to avoid as far as possible, discrimination between different media, different tests or indicators might be appropriate to determine whether they are directed at the UK. We would particularly welcome views on this.

Proposed indicators

2.17 We propose that the following indicators should apply to financial promotions on Web sites to ascertain if financial promotions are directed at the UK:

Whether the promotion contains prominent statements indicating that it is not targeted at the UK and should not be relied on by UK persons.
Whether the promotion contains prominent statements indicating its intended target audience (not being in the UK).
Whether the promotion itself is not promoted in other promotions which are directed at the UK (to prevent other communications issued in the UK referring to a Web site which purports not to be directed at the UK) including having regard where appropriate to the existence of any hypertext links.
Whether the Web site contains systems designed to prevent participation by UK persons in the investment or investment service to which the promotion relates.

2.18 The penultimate indicator refers to a need to have regard, where appropriate, to the existence of hypertext links. It is not the intention that the existence of hypertext links between Web site "A" (which is based in the UK or directed at UK persons) and a second Web site "B" (which is based overseas and promotes financial services) should in all circumstances be indicative that a promotion contained on Web site B is directed at the UK. Relevant factors to take into account when determining the significance of hypertext links could include consideration of which person established the link, whether there was cooperation between the Web site operators in its establishment, the existence of any commercial or other arrangement between the two site operators and whether the link itself could be considered to be a promotion (discussed further below). Views are invited on this proposed approach.

2.19 As regards the last indicator, it is a matter for consideration to what degree systems should be in place to prevent action being taken by UK persons on information contained in an unapproved financial promotion which originates outside the UK. Clearly, where, for example a Web site contains material that can lead directly to an investment through the Web site itself, it is desirable that systems are in place to prevent UK persons from directly making such an investment. At the other end of the scale, a Web site which contains information which is only indirectly promotional and can only lead indirectly to investment through means unrelated to the Web site, such as a list of share prices on Web site owned by a stock exchange, might not need the same set of systems to prevent UK persons from acting on the information available. However, commercial Web sites have differing degrees of interactivity (almost all will allow e-mail communications with the organisation owning the Web site) and interactivity could take place in other media (such as where a Web site contains a telephone contact number or postal address). If the exemption is only valid for communications where systems are in place to prevent participation by UK persons through any media, this would prevent a potential loophole in investor protection. On the other hand, whether such a demanding requirement would over-burden commercial systems must be considered. Comments on this point, and what distinctions might be drawn between the obligations applicable Web sites of varying degrees of interactivity are invited.

Passive Communications Providers

2.20 The July 1998 Consultation Document on the draft Bill proposed that passive providers of communications should not be subject to the financial promotion prohibition. Such an exemption is intended to exclude certain Internet systems providers. However, it is not intended to provide a general exemption for sites containing financial promotional material if it is directed at the UK. Therefore it is proposed that there should be an exemption from the financial promotion prohibition for communications networks, where each of the following factors apply:

The communication was not created by the communications network.
The communications network is involved only in the transmission, and possibly the encryption of the communication (and does not, for example, have a direct financial benefit in the Web site, such as a commission or profit sharing arrangement).
The communications network does not control the content of material communicated on its network, except for reasons of public interest.

2.21 The role of passive communications providers in cooperating with regulators to enforce the provisions of the UK regulatory regime also needs to be considered. In particular, views are invited on the desirability of imposing liability on passive providers under the Bill if, following notification by the FSA of a non-compliant Web site, the passive communications provider fails to take action to close it down as directed.

Hypertext links

2.22 The question has been raised as to whether hypertext links, which connect Web sites or pages, could themselves be considered a financial promotion in certain circumstances. It is considered that in general, hypertext links do not of themselves present any particular consumer protection concerns additional to the sites to which they relate. It is the Web site communicating the information which contains the risk for investors, rather than the links as such. Therefore it should be possible for a Web site to have links with financial promotion Web sites without the link itself needing to be issued or approved by an authorised person.

2.23 However, a hypertext link is not just a connection. It is also an icon, word or phrase which gives access to the linked Web page. This 'link entry' material might have contents which would themselves constitute a financial promotion, responsibility for which could fall either on the person supporting the Web page with the hypertext link, or on the person who is responsible for the site to which the link connects. It is proposed that such material should be the responsibility of the site which is connected by the link, where the link is established with the approval of that person. Otherwise the responsibility for the link entry material would rest with the Web site on which it appears. It is proposed, in any event, that a hypertext link whose link entry material contained nothing more than the name of the body whose Web site it links to, should be exempt from the financial promotion prohibition. Again, views are invited on this approach.

PART THREE - PROPOSED NEW EXEMPTIONS

1. Exemptions where there is no pecuniary or other benefit

2. Solicited calls

3. Generic promotions

1. Exemptions where there is no pecuniary or other benefit

Personal Communications

1.1 There is currently no need for an exemption from the investment advertising prohibition under the Financial Services Act for investment advertisements of a personal nature. However, since the financial promotion prohibition under the draft Financial Services and Markets Bill will have a wider scope than the current prohibition on investment advertisements, we consider it necessary to provide in the new regime an exemption relating to certain personal communications.

1.2 We would welcome views on our proposal that the exemption from the financial promotion prohibition for personal communications should cover promotions made by persons:

to a close relative.
otherwise than in the course of business carried on by the promoter and which relates to any investment in which he holds, or is to hold, a beneficial interest.
in circumstances where the promoter does not receive any direct or indirect benefit.

1.3 Views are also sought on the extent to which additional or alternative tests are desirable. For example, it has been suggested that a limited circulation test (permitting personal promotions to be made to a limited number of persons) might be appropriate, or alternatively that a monetary threshold might be introduced, exempting for example personal communications relating to investments with a value of less than a certain amount.

Journalists

1.4 Under the Financial Services Act, a person who gives investment advice by way of business must be authorised unless the advice is given in accordance with an exclusion under that Act. One of the exclusions relates to advice given in a newspaper or which is broadcast on TV or radio, when the principal purpose of the publication or broadcast taken as a whole, is not to lead persons to invest in any particular investment. There is often a grey area between what constitutes investment advice and what constitutes a financial promotion, and in reviewing the current legislation, a lacuna has become apparent in relation to publications by journalists which, although constituting permissible investment advice, might stray into the territory of the financial promotion regime.

1.5 Accordingly, we propose to provide an exemption from the financial promotion prohibition for communications made in a periodical publication or broadcast provided that the journalist and the publisher or broadcaster does not receive any direct or indirect benefit from the person or group whose services or investments are advertised. The aim is to distinguish between, on one hand, financial journalism about particular services or investments (which might stray into the boundaries of financial promotion but should not be regulated) and, on the other, advertisements for the investments or services which are placed in the newspaper or on TV or radio by the investment product provider or issuer, or so-called "advertorials" where the purpose of an editorial or newspaper column is in fact to advertise a particular investment or service. Comments are invited on this approach and also on the extent to which it is desirable to allow unapproved editorials, for example, to give contact details regarding new issues or investments where those details have been taken from a press release issued by a firm or individual.

2. Solicited calls

2.1 As indicated in Part One, the Financial Services Act imposes a prohibition on the making of unsolicited calls (that is, uninvited telephone calls and personal visits), although there is no equivalent restriction on solicited calls, except to the extent that these are covered by more general conduct of business rules regulating authorised persons' dealings with their customers. In contrast, there is at present no generalised exemption for solicited investment advertisements.

2.2 We consider that the consequences of a solicited call are potentially no less significant than those which could result from a solicited written advertisement and indeed no less than those that might follow from an unsolicited call. Accordingly, we propose that the new regime should contain no generalised exemption from the financial promotion prohibition for solicited calls.

2.3 However, it is proposed that in appropriate circumstances, the exemptions which will apply to communications under the new regime will apply to solicited communications. In particular, we expect that the proposed exemption for personal communications will extend to solicited communications. It is also likely that additional exemptions will also be needed, for example, to allow solicited communications to be made in response to a legitimate financial promotion and possibly also to permit solicited communications from professional advisers in certain circumstances (for example, to permit a solicitor to write to his client confirming that a share purchase agreement sent to his client is acceptable for signature, or to permit an accountant to make a positive due diligence report on a company, where these communications might be considered a financial promotion). Views are welcomed on whether these, and any further, exemptions for solicited communications are considered desirable or appropriate.

3. Generic promotions

3.1 Some consultation responses have pointed out that under the Financial Services Act, it is currently unclear whether general information about the merits of investing in, for example, investment trusts, or bonds as opposed to equities, can be issued without first needing the approval of an authorised person. They have therefore asked for a general exemption for "generic" promotions.

3.2 The Consultation Document issued in February concerning the scope of regulated activities contains a proposal to clarify that generic advice relating to, say, investment trusts in general, does not constitute investment advice. We would welcome views on the desirability of an equivalent exemption for financial promotions.

PART FOUR - PROPOSED APPROACH TO CURRENT EXEMPTIONS FOR INVESTMENT ADVERTISEMENTS AND COLD CALLS

1. General Approach

2. Approach to be taken in respect of current exemptions

3. Unsolicited calls

4. Deposits and general insurance

5. Public offers legislation

1. General Approach

1.1 The July 1998 Consultation Document indicated that promotions to be subject to the proposed financial promotion prohibition will be broadly similar in substance to those regulated under the current advertising and unsolicited calls regimes. We propose therefore to consider all of the exemptions currently applying under the Financial Services Act for inclusion in the single Financial Promotion Exemptions Order. In many cases, there are similar exemptions from both the advertisement and unsolicited calls regimes and it is intended that these exemptions will be consolidated. For certain exemptions, it will be appropriate to permit promotions using all forms of communications (including unsolicited calls), whereas for others it will be appropriate to introduce (or maintain) particular restrictions. Adjustments may also need to be made to take into account the more expansive scope of the financial promotion prohibition compared to the current unsolicited calls and advertising regimes.

1.2 In considering the current exemptions from the Financial Services Act regime, we are mindful that, over time, the exemptions have become increasingly complex and unwieldy. In preparing the proposed new Financial Promotion Exemptions Order, we will seek to rationalise, and to clarify, as far as possible, the exemptions currently applying. We would welcome comments on our proposed approach to the preparation of the proposed draft Order, and on the current set of exemptions, including on the extent to which any of the current exemptions do not need to be continued in the proposed Financial Promotion Exemptions Order, on grounds of obsolescence. We would also welcome reasoned proposals for additional exemptions, particularly where it is thought these are necessitated by the change from the current regimes for investment advertisements and unsolicited calls to the proposed financial promotion regime. Investment Advertisements

2. Approach to be taken in respect of current exemptions

General

2.1 This section discusses the approach to be taken in respect of the exemptions currently contained in the Financial Services 1986 (Investment Advertisements) (Exemptions) (No 2) Order 1995 (the 1995 Order) and the Financial Services 1986 (Investment Advertisements) (Exemptions) Order 1996 (the 1996 Order)(7). These Orders set out the exemptions currently applying to the issue of investment advertisements under the Financial Services Act.

2.2 The section will consider first, our proposed approach to various classes or types of exemption currently applying to investment advertisements, secondly, the question of the extent to which certain exemptions should be capable of being used in conjunction with others, whilst other exemptions should not, and thirdly, certain specific exemptions contained in the 1995 and 1996 Orders.

Classes or types of exemption currently applying to investment advertisements

2.3 Exemptions requiring particular contents or warning statements Adapting the current investment advertisement exemptions to apply to various different media, such as oral communications, has a number of consequences. Certain of the current investment advertisement exemptions(8) provide for exemptions where particular contents requirements, disclosures or warning statements have been complied with. These forms of exemption lend themselves most obviously to communications made in written form. However, our underlying objective is to allow (except where it is inappropriate for the purpose of a particular exemption) promotional communication through all possible media.

2.4 In ascertaining how best to achieve this objective, we consider that there is justification for adopting a different approach for different media in certain circumstances. This is desirable because whilst, for example, a written communication, such as a promotional leaflet or letter, is a clearly identifiable promotional "unit" (and it is therefore possible to say with certainty what the communication to which the required contents should relate is), other forms of promotional communications, such as Internet Web pages, are not necessarily capable of such clear definition. For example, a Web site "promotion" might contain a mixture of promotional and non-promotional material. Also, in visiting a Web site, browsers might bypass certain of the promotional pages or simply access part of a Web site by way of connection via a hypertext link.

2.5 We suggest that in the case of investment advertisements requiring certain information to be given, it may be appropriate to distinguish between different media. In particular, we are considering whether the following methods of compliance would, generally, be appropriate for the following media:

For oral communications (including telephone calls and meetings), a copy of all the required information should be given or sent to those receiving the promotion for the first time and before any investment contract is entered into (but not subsequently, unless the information required has altered).
For Web pages on the Internet, all pages containing promotional material must contain all the required information or be clearly connected to such information (for example, by a prominent hypertext link).
For more clearly identifiable units of communication, such as written advertisements or electronic mail, each unit should contain all such information.

2.6 It is also possible that different approaches to the provision of particular information would be suitable in the context of particular exemption, and we would welcome comments in this context.

2.7 Exemptions for promotions directed at a particular audience Some of the current exemptions are based on the concept of an advertisement being issued with a limited range of recipients in mind. Examples include the exemption for advertisements directed at informing or influencing persons of a particular kind (such as governments or professional investors), advertisements issued by a body corporate to members or creditors, advertisements issued to persons sufficiently expert to understand the risks involved and advertisements relating to matters of common interest(9).

2.8 Two main approaches to these sorts of exemptions have been considered. First, exemptions could be designed around the concept that they are directed or targeted at a certain group, in similar fashion to the "directed at the UK" exemption outlined in Part Two. The result of this would be that "restricted circulation" financial promotions could be made available on the Internet and more widely, provided that systems were in place to prevent persons other than those of the specified kind from responding to them. Additionally, the promotion could contain warning statements providing that people other than the target audience must not act on the basis of, or in response to, the material. A similar approach is currently adopted by Article 8 of the 1995 Order, which allows investment advertisements targeted at Governments and professional investors to be issued more widely, provided that, on the basis of certain indicators contained in the Article, they are considered to be directed only at the specified audience. The advantages of this route must, however, be balanced against the potential risk that, despite the existence of preventative systems and warning statements, information could nevertheless be made available to ordinary investors who might then seek to circumvent the systems or act on the information contained in the promotion by using the services of another financial services provider.

2.9 The second approach would be to require the promotional communication to be made only to the particular audience, with the likely effect that the use of Web sites would be severely restricted, unless, for example, a test similar to that adopted by Article 11 of the 1996 Order (advertisements to persons sufficiently expert to understand the risks involved) was adopted. That Article provides for a different test in relation to advertisements issued in documentary form, and other advertisements communicated in other media (such as the Internet), respectively. In the case of advertisements issued in documentary form, the Article requires that the advertisement is issued only to persons whom the issuer reasonably believes are sufficiently expert to understand the risks. As for advertisements issued by different forms of media, the exemption requires instead that the person issuing the advertisement must reasonably believe that the means by which the advertisement is disseminated are such that it will not generally be made available, except to persons who can lawfully receive the advertisement.

2.10 We consider that adopting an approach which either imposes a blanket restriction on certain promotions, or which relies on different tests for different media, would not be ideal given our aim of updating the legislation to support, where appropriate, the development of technology. Nor would it assist in adopting, as far as possible, a simple and technologically-neutral approach. Nevertheless, we would welcome views on the extent to which either of the two approaches are desirable, or alternatively, on whether an alternative route would be more appropriate. We are particularly interested in this context in views on the potential implications of the various approaches for consumers.

2.11 Prior approval of oral communications

Some commentators on the draft Bill pointed out that as currently drawn, Clause 17 might require that oral promotions made by unauthorised persons would first need to be approved by an authorised person before being made. However, that is not the general intention. Under the proposed regime, oral communications (except perhaps those in standardised form, such as a scripted conversation or an oral or visual recording) are not expected to be capable of prior approval by an authorised person. Instead, it is proposed that a number of the exemptions currently applying to investment advertisements will extend both to solicited and unsolicited oral communications, and that those exemptions currently contained in the FSA's Common Unsolicited Calls Regulations(10) will also generally be preserved. Also, as discussed in Part Two, certain new exemptions, including in particular the personal communications exemption, are proposed to apply to oral communications.

2.12 This approach is consistent with that currently applying under the Financial Services Act to unsolicited calls, and, as discussed in Part Two, ensures that under the new regime similar treatment will be afforded to both solicited and unsolicited calls. However, views are invited on whether there is a need for any further, specific, exemptions in respect of oral communications.

The extent to which financial promotion exemptions should be stand-alone or capable of being used in conjunction with others

2.13 Under the 1995 and 1996 Orders, certain exemptions are only available if the advertisement to which they relate falls solely within that particular exemption, whilst others can be used with various other exemptions (in other words, they are "cumulative"). Other exemptions are ambiguous in this respect, and can be used to exempt any investment advertisement which falls within their scope.

2.14 We consider that there may be scope to simplify the various approaches currently relating to stand alone and cumulative exemptions. We would welcome views on whether and in what manner exemptions should be available in combination.

Specific Articles of the 1995 and 1996 Orders

2.15 Views are welcomed on the application of the current exemptions and on ways in which they might be clarified or improved. In particular, we would welcome comments on the following:

Article 4 of the 1995 Order (takeovers of private companies) and the extent to which this exemption is used in practice, or whether it might instead be removed or modified.
Article 5 of the 1995 Order (sale of body corporate) which is clearly of relevance to takeovers of private companies also. We are proposing to relax the current test contained in Article 5, by providing that sales relating to acquisitions of management control (broadly, over 50 per cent. of a company's shares) will fall within the exemption.
Articles 8 to 10 of the 1995 Order (advertisements directed at informing or influencing persons of a particular kind) and their inter-relationship with similar limited circulation or experts' exemptions under the 1996 Order (such as Article 11 - advertisements issued to persons sufficiently expert to understand the risks involved) and the Common Unsolicited Calls Regulations (Regulation 1 - non-private investors). Questions include the extent to which the tests should be amalgamated, which if any criteria or exemptions should be dropped, amended or introduced and lastly, the extent to which the resulting exemption(s) should be stand-alone or cumulative.
Article 3 of the 1996 Order (investment advertisements issued by a body corporate to members or creditors) together with similar exemptions in Article 4 of the 1996 Order (advertisements relative to relevant securities), Article 5 of the 1996 Order (investment advertisements relating to relevant bearer securities issued by body corporate) and Article 14 (advertisements issued by operators of schemes recognised under section 87 or 88 of the Financial Services Act) which generally exempt advertisements issued by a company to its shareholders or creditors or similar investors. Comments are particularly welcome on whether similar exemptions from the financial promotion prohibition should be extended to all forms of communication, or whether, for example, cold-calling in these circumstances should be restricted.
Article 6 of the 1996 Order (investment advertisements issued in connection with employees' share schemes) and whether this exemption is currently sufficient to permit unapproved investment advertisements in association with bone fide employee share schemes, or whether this exemption causes difficulties in practice. Regulation 9 of the Common Unsolicited Calls Regulations permits cold-calling in association with employee share schemes, and it is intended that these provisions be combined in the Financial Promotion Exemptions Order.

3. Unsolicited calls

3.1 This section discusses the approach to be taken in respect of the exemptions currently contained in the Common Unsolicited Calls Regulations 1991. These Regulations, which apply to both authorised and unauthorised persons, set out the exemptions currently applying to the prohibition on unsolicited calls contained in Section 56 of the Financial Services Act.

3.2 There are certain exemptions from the unsolicited calls prohibition which may only be appropriate to circumstances where the oral communication is being made by an authorised person and therefore may not merit inclusion in the proposed Financial Promotion Exemptions Order. Examples might include Regulation 2 (sale of non-geared packaged products), Regulation 3 (supply of callable investment services), Regulation 5 (acquisition of investment business) and Regulation 10 (occupational pension schemes). We would welcome views on whether these exemptions should, under the draft Bill, continue to be available for unauthorised persons.

3.3 Views are also welcomed on the application of specific current exemptions and on ways in which they might be clarified or improved. In particular, we would welcome comments on the following:

Regulation 4 (existing customers) which permits calls made on existing customers of the person calling or, if different, the firm entering into the consequent investment agreement, or associates of either, provided that the customer relationship envisaged cold calls. This would appear to be relevant to two sets of circumstances. First, calls made in the course of concluding an investment agreement to which the investor has indicated his assent, as where an unauthorised person is contracted to provide administrative services consequent on an agreement. Such communications should continue to be permitted. Second, calls made subsequent to the indication of assent in relation to other products and services produced by the same provider (or his associates). In the second case, the same issues largely arise as are relevant to providing an exemption for all solicited communications (discussed in Part 3). It would not be appropriate, in these circumstance to offer a general exemption from the financial promotion prohibition for promotions to existing customers. We would, however, welcome consultation respondents drawing our attention to areas where this approach (i.e. not providing an exemption for financial promotions to existing customers) would cause particular difficulties, and we will consider the case for specific, targeted exemptions to deal with them.
Regulation 6 (public takeovers) which permits calls made by or under the supervision of an FSA authorised firm (or passporting firm) in connection with a takeover or a substantial acquisition regulated by the Takeover Code (or equivalent requirements in another Member State). It is intended that unauthorised persons should continue to be able to make financial promotions in connection with a takeover or a substantial acquisition regulated by the Takeover Code, subject to the supervision of an authorised person (and any relevant rules made by the FSA), and we would welcome views on the extent to which it would be appropriate to exempt other promotional activities similarly supervised by authorised persons.

4. Deposits and general insurance

General

4.1 The Government's proposal to limit controls over the promotion of deposits and general insurance to misleading promotions was set out in the July 1998 Consultation Document. Advertisements concerning these activities are currently subject to regulation under the Banking Act (Advertisements) Regulations 1988, the Credit Institutions (Protection of Depositors) Regulations 1995 and the Insurance Companies Regulations 1994(11). It is intended that the substantive provisions of these Regulations should, broadly, be preserved, although certain changes are proposed and are set out below.

Deposits

4.2 Currently, the Banking Act (Advertisements) Regulations apply to persons who do not carry on a deposit-taking business in the UK or another EEA Member State, but who wish to advertise in the UK to take deposits overseas. The Regulations require that certain information is to be given in advertisements concerning deposits, such as the full name of the deposit-taker, the country or territory in which the deposit-taker's principal place of business is located, place of incorporation and a statement of the deposit-taker's assets and liabilities. Additional disclosure requirements apply if the advertisement states the rate of interest applicable to the deposit being advertised and statements must also be made concerning the currency of the deposit.

4.3 The Credit Institutions (Protection of Depositors) Regulations 1995 generally apply to deposit advertisements and explanatory literature issued by UK authorised or EEA passported banks operating in the UK. We are considering the extent to which it would be appropriate more closely to align the relevant provisions of each set of Regulations under the proposed Financial Promotions Exemptions Order, and would welcome views on this proposal. In particular, it is proposed to remove the current disclosure requirements relating to interest rates and currency which apply to persons subject to the Banking Act (Advertisements) Regulations, but to apply to them certain additional disclosures concerning the name of the deposit-taker's regulator, relevant compensation schemes and dispute resolution procedures. It is intended that UK authorised and passporting EEA banks will be subject to similar advertising requirements under the FSA's rules. The Treasury's power under Clause 76(3) of the Bill is of note in this context, insofar as it will enable the Treasury to limit the FSA's rule-making capability in relation to deposit and general insurance advertisements where the Treasury considers it appropriate to do so.

4.4 We are also considering the extent to which (subject to the requirements of European law) it will be appropriate to require the disclosure requirements for deposit advertisements to be adhered to where the deposit advertisement also concerns an investment which is subject to the other rules regarding financial promotions (for example, where a deposit might also be considered to be a debenture). Views on this question are welcome.

General Insurance

4.5 It is proposed that a similar approach to that described for deposit advertisements should apply to insurance advertisements issued by non-EEA overseas insurers. Again, consideration is to be given as to the extent to which the restrictions should apply where the advertisement is also a financial promotion relating to an investment falling within another head of the Regulated Activities Order (if, for example, it relates to rights in a long-term insurance contract) in which case, it will be subject to the wider restrictions on making financial promotions. It is intended that UK and EEA incorporated insurers will be subject to similar advertising requirements imposed under the FSA's rules.

5. Public offers legislation

5.1 Public offers legislation sets out requirements for preparing prospectuses when securities are offered to the public in the UK for the first time. In effect, it is a statutory advertisement regime applicable to offers of relevant securities.

5.2 Under current arrangements, a prospectus prepared in accordance with the Public Offers of Securities Regulations(12) ('POS Regulations') benefits from an exemption from the investment advertisement regime contained in the Financial Services Act. However, where there is an exemption from the requirement to prepare a prospectus, the investment advertisement regime applies and therefore offers of securities made without a prospectus are made using an advertisement approved by an authorised person, unless an exemption under the Financial Services Act applies. It is intended that this overall structure will remain under the proposed financial promotion regime. However, where there are similar exemptions from both prospectus and investment advertisement regimes (as with offers in relation to employees' share schemes) it is intended, in general, that the exemptions should be compatible. The interaction of the POS Regulations and the financial promotion regime in the context of seeking business angel investment is considered further in Part Five.

PART FIVE - INFORMAL CAPITAL RAISING

1. Introduction

2. Current regime: Investment advertising exemptions relevant to informal capital raising

3. US Experience and Australian proposals

4. Potential concepts

5. Consultation

1. Introduction

1.1 The Government attaches great importance to small and medium sized firms gaining access to the investment funding they need to grow and succeed. However, industry observers have suggested that the current investment advertising rules have been a significant impediment to the raising of capital by small and medium sized enterprises (SMEs). Working groups on the financing of high technology business (chaired by Sir Peter Williams(13)) and on smaller quoted companies (chaired by Derek Riches(14)) as well as the joint CBI/DTI TechStars working party have asked the Treasury, as part of the regulatory reform process, to allow companies directly to promote investment opportunities to more sophisticated private investors, commonly known as business angels. This recommendation reflects three concerns: first, that private individuals (that is to say, those who are not investment professionals) are an extremely important source of finance for early stage firms; second, that the costs of approval of investment advertisements by an authorised person are prohibitive in the case of smaller companies seeking relatively modest sums of money; and, third, that it is desirable to define a category of private investors of greater sophistication and resources for whom the degree of investor protection provided by the current investment advertising restrictions may be disproportionate.

1.2 In response to these requests the Treasury is seeking views on possible ways to liberalise the regime governing the raising of informal capital from private individuals as part of the review of policy on financial promotion. This Part of the Consultation Document sets out the restrictions currently applying to companies seeking funds from private individuals, outlines approaches which other countries have adopted and proposes various potential descriptions of sophisticated investor which might be used in the Financial Promotions Exemptions Order.

1.3 Parallel issues - of differentiated approaches to regulation for different counterparties or transactions - are raised by FSA's recent discussion paper on the future regulation of inter-professional business(15). However, it may be that certain arrangements for authorised firms, such as assessing the financial sophistication of customers, are not practical for companies, such as smaller companies, offering securities.

2. Current regime: Investment advertising exemptions relevant to informal capital raising

2.1 Unless an exemption applies, a company offering its securities to potential investors must have its investment advertisement approved or issued by an authorised person. Under the FSA and SRO rules, the authorised person has to be able to show on reasonable grounds that the advertisement is fair and not misleading. In practice, the authorised person is likely to undertake a considerable degree of due diligence prior to approval of an investment advertisement, and this expense can be especially burdensome in the case of smaller companies.

2.2 However, there are already some limited exemptions to the investment advertising regime that can be of assistance in informal capital raising:

sale of a body corporate(16): this exemption currently allows the issue of unapproved advertisements for the sale of a 75% stake in a company. We are proposing the reduction of this threshold to over 50% of a companies shares and the introduction of an exemption relating to acquisitions engendering management control;
advertisements directed at informing or influencing persons of a particular kind(17): this exemption applies to advertisements which may reasonably be regarded as informing or influencing only persons of a specified kind, including persons whose ordinary activities involve them in acquiring or holding investments for the purposes of a business carried on by them. Whilst this exemption will generally exempt investment advertisements issued to investment professionals it is unlikely to apply to individuals acting as business angels;
advertisements issued for the purpose of promoting or encouraging industrial or commercial activity or enterprise(18): this allows business enterprise agencies and similar bodies to advertise shares in or debentures of private companies provided that they have no direct or indirect pecuniary interest in those companies and the advertisement contains specified wording drawing the attention of investors to the possible high risks of the investment; and
advertisements issued to persons sufficiently expert to understand the risks involved(19): this allows limited circulation of advertisements to certain specified persons, which include persons authorised or exempted under the Financial Services Act; broadcasters and publishers; public authorities; companies above a certain sizeand, in some circumstances, their directors and employees; and trustees of large trusts. This exemption is unlikely to apply to an individual seeking to invest as a business angel.

The interaction of prospectus requirements and advertising regulations

2.3 The advertising of investment opportunities by companies is governed not only by the investment advertising restrictions of the Financial Services Act, but also by the requirement to produce a prospectus under the POS Regulations(20).

2.4 A company which wishes to raise risk capital will normally seek to offer debt or equity securities to investors. Whenever securities are offered to the public for the first time in the UK, there is an obligation on the company to prepare a prospectus containing particulars of the securities offered and information on the company's business and management. However, not all offers of securities are considered "offers to the public". Offers of securities in the following circumstances do not trigger the requirement to produce a prospectus(21):

Where the securities are offered to investment professionals;
Where the securities are offered to no more than fifty persons;
Where the securities are offered to a restricted circle of persons whom the offer or reasonably believes to be sufficiently knowledgeable to understand the risks involved in accepting the offer; or
Where the minimum consideration which may be paid for securities acquired pursuant to the offer is at least ecu 40,000 (circa £25,000).

2.5 Prospectuses which comply with the requirements of the POS Regulations are exempt from the investment advertising regime and therefore the use of a complying prospectus as an investment advertisement by a company does not require approval by an authorised person. However, a company will generally require the approval of an authorised person for the dissemination of any offer document or advertisement other than a formal prospectus. Accordingly, unless there are exemptions from both the requirement to prepare a prospectus and the investment advertising regime, companies must still prepare a regulated offer document (either a prospectus or an approved investment advertisement), which, in the case of smaller companies in particular, may prove to be a considerable burden.

2.6 Where an offer is to be made to the public at large, the requirement for a regulated offer document is entirely appropriate. However, companies will typically seek to raise finance from institutional investors on the back of an unapproved business plan (for example, using the POS Regulations exemption for offers to professional investors and the investment advertising exemption for advertisements issued to persons sufficiently expert to understand the risks involved). It may be that there is a potential group of private individuals for whom - on account of their greater sophistication or resources - it would be appropriate for companies to solicit on the same unapproved basis.

3. US experience and Australian proposals

3.1 Other jurisdictions have recognised categories of individual investors who may choose not to be granted the full range of investment protections normally available to the general public.

3.2 In the USA, the SEC recognises that certain classes of investor are able to form their own opinions about the risk of a particular investment and do not require the protection of SEC registration. Consequently, the SEC does not require companies to provide these investors with formal offer documentation(22). Individuals are able to certify themselves as "accredited investors" on the basis of their net assets (in excess of $1 million - around £625,000) or income (in excess of $200,000 - around £125,000 - per year for the previous two years). Normally, potential accredited investors will be evaluated by brokers or financial intermediaries on the basis of a comprehensive statement, with supporting evidence, of the investors' financial positions. Brokers and company advisers compile their own lists of accredited investors, to whom they may pass investment opportunities, but the lists are generally made publicly available. Certification documents relating to individual transactions commonly also emphasise the need for the investors to be able to afford the loss of their entire investment.

3.3 In addition to SEC regulation at the federal level, individual states within the USA may also impose some regulation on the issuance of shares. The exact rules and potential exemptions vary from state to state, but state regulation is generally much less extensive than SEC regulation at the federal level.

3.4 In Australia, the Commonwealth Government is proposing, as part of its Corporate Law Economic Reform Program(23), to reform its current "sophisticated investor" exemption from the obligation to prepare a prospectus. Currently, the exemption applies to investments of more than A$500,000 (approximately £200,000). However, the need to invest so large a sum causes difficulties for investors in diversifying their portfolio, and many SMEs may in fact seek smaller sums in total. Therefore legislation has been prepared to allow offers of securities without a prospectus (or any other regulated offer document) to investors with a gross income of at least A$250,000 in the previous two financial years or net assets of A$2.5 million. The proposed legislation will require a qualified accountant to certify as to the investor's income or assets in order to protect both investors and issuers (who might otherwise inadvertently offer securities to unqualified investors). An additional exemption is also proposed for offers made to investors through a licensed dealer, where the dealer is satisfied on reasonable grounds that they have previous experience in investing in securities which allows them to assess the investment.

4. Potential concepts of sophisticated investor under UK law

4.1 There are several potential methods of defining a class of sophisticated investors:

High net worth. As the examples above indicate, other jurisdictions have relied on this approach in designing their sophisticated investor disclosure exemptions. Wealthy individuals have the resources to seek their own independent investment advice, are generally better able to withstand financial losses and are often (but by no means always) more financially sophisticated than other members of the general public. Wealthy individuals are also, by definition, those individuals who would be able to invest significant sums to fund business growth. However, importantly, mere possession of considerable net assets does not necessarily imply sophistication in financial matters.
Expertise. Given that the exemption may be based on the premise that the potential investors are relatively sophisticated in investment matters, an exemption could be defined which required the sophisticated investor to have a certain level of expertise or experience in financial matters. This requirement could range from, at the basic level, having previous experience in securities dealings, through to a definition similar to that currently employed by SROs in their "non-private customer" rules, where certain conduct of business requirements are waived in respect of private customers (subject to certain conditions) where the firm has issued certain risk warnings to the customer, believes on reasonable grounds that the customer has relevant experience and has obtained the written consent of the customer. The difficulty with approaches based on expertise is that, unless there is a clear and unambiguous definition, it would be very difficult for a company seeking investment to assess the relative expertise of potential investors (more difficult for the company than for a financial services provider operating under SRO rules).
Registration/Networks. Even if a new exemption for the advertisement of investments to certain class of investors was introduced, it would still be necessary for the companies and investors to be able to contact each other. Sophisticated investors could be permitted to join a register (whether maintained by a public body or nominated non-profit networks) which could pass on investment opportunities from companies to investors. (An exemption might also be needed to permit communications encouraging people to join such a register). However, the cost of maintaining such a register would have to be re-couped from those joining the register or wishing to pass on investment materials. Individuals might also not wish to join such a register on grounds of privacy.
Other. Various other requirements could also be considered, including minimum/maximum investment limits, and the inclusion of mandatory warning statements.

4.2 If unapproved investment advertisements to sophisticated individual investors were permitted, it would, in principle, be consistent to permit unapproved investment advertisements to sophisticated individual investors acting jointly (in partnerships, investment clubs, etc. comprised wholly of sophisticated investors) or to smaller companies which do not at present fall within the exemption for expert investors. In the case of investment clubs or partnerships, consideration would need to be given to ensuring that each member of the club or partnership was a person to whom the financial promotion could legitimately be issued.

4.3 In view of the particular needs of smaller companies, any new exemption might apply only to those securities covered by the POS Regulations (namely equity and debt securities and associated warrants and certificates).

5. Consultation

5.1 Comments are invited on the general approach of allowing unapproved investment advertisements to be made to a defined category of private investors. Respondents may also wish to comment on any related aspects of financial regulation which are considered relevant to the raising of informal capital, particularly in relation to the needs of smaller companies.

Annex A - SUMMARY TABLES OF CURRENT AND PROPOSED NEW FINANCIAL PROMOTION REGIMES

The current regime for advertising financial services (including cold calling)

Type of promotion	Regime for unauthorised persons	Regime for authorised persons
Investment advertisements	Prohibited unless: - approved by authorised person; or - made in accordance with exemptions in: a) Section 58 of the Financial Services Act 1986; or b) 1995 Investment Advertisements Exemptions Order made by HM Treasury; or c) 1996 Investment Advertisements Exemptions Order made by HM Treasury	Subject to rules relating to investment advertisements made by FSA, SROs and RPBs
General insurance advertisements	Subject to advertisement provisions contained in the Insurance Companies Regulations 1994	Same as for unauthorised persons
Deposit advertisements	Subject to advertisement provisions contained in the Banking Act Advertisement Regulations	Same as for unauthorised persons
Unsolicited calls	Prohibited unless made in accordance with exemption in Common Unsolicited Calls Regulations made by FSA	Same as for unauthorised persons
Solicited oral communications (other than an advertisement)	No specific regulation	Subject to rules relating to investment advertisements made by FSA, SROs and RPBs

The proposed new regime for financial promotion under the Bill

Type of promotion

Regime for unauthorised persons

Regime for authorised persons

All financial promotion communications.

Prohibited unless: - Approved by authorised person; or

- Made in accordance with exemptions in single Financial Promotion Exemptions Order made by HM Treasury

Subject to rules relating to financial promotion by FSA (The FSA's power to make rules on financial promotion is subject to limitations imposed by HM Treasury by order (draft Clause 76(3)).

1. Financial Services and Markets Bill: A Consultation Document (July 1998)

2. Principally under the Insurance Companies Act 1982, the Financial Services Act 1986 and the Banking Act 1987.

3. The proposed regulated activities under the Bill were published in draft for consultation earlier in the year. Financial Services and Markets Bill: Regulated Activities - A Consultation Document (February 1999).

4. Financial Services Act 1986, Part V - Sections 56 and 57, et seq.

5. Most recently, the Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No 2) Order 1995 (SI 1995/1536) and the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (SI 1996/1586) as amended by the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1997 (SI 1997/963).

6. The Common Unsolicited Calls Regulations 1991 (Release 101).

7. SIs 1995/1536 and 1996/1586 (as amended) respectively.

8. Such as Article 3 of the 1995 Order (investment advertisements issued for the purpose of promoting or encouraging industrial or commercial activity or enterprise) and Article 12 of the 1996 Order (advertisements relating to matters of common interest)

9. Article 8 of the 1995 Order, Article 3 of the 1996 Order, Article 11 of the 1996 Order and Article 12 of the 1996 Order, respectively.

10. The Common Unsolicited Calls Regulations 1991 (Release 101)

11. SIs 1988/645, 1995/1442 and 1994/1516 (each as amended) respectively.

12. SI 1995/1537. Amendments to the POS Regulations were announced by the Treasury on 11 March 1999.

13. The Working Group on the Financing of High Technology Businesses, Final Report, Published HM Treasury, November 1998.

14. Smaller Quoted Companies, A Report to the Paymaster General, Published HM Treasury, November 1998.

15. Differentiated regulatory approaches: future regulation of inter-professional business, Published FSA, October 1998.

16. SI 1995/1536 Art 5

17. SI 1995/1536 Art 8

18. SI 1995/1536 Art 3

19. SI 1996/1586 Article 11.

20. And also, where relevant, the continuing provisions of Part III of the Companies Act 1985 as they apply to unlisted securities (Sections 81, 82, 83, 85, 86, 87 and (part of) 97, which, respectively, prohibit public offers by private companies, regulate subscription lists of public offers, require a minimum subscription to be received before shares are allotted, regulate offers where a prospectus states that an application for listing will take place and require disclosure of underwriting arrangements and commissions.). Repeals of certain of these provisions for certain purposes were announced by the Treasury on 11 March 1999.

21. A full list of the circumstances where an offer is not deemed to be a public offer for the purposes of the POS Regulations (and therefore does not require a prospectus) is contained in Regulation 7(2). The exemptions which are available in the UK POS Regulations are based on the exemptions allowed by the European Prospectus Directive (EEC 89/298).

22. Under Rule 501 of Regulation D of the Securities Act 1933.

23. Initial proposals were set out in "Corporate Law Economic Reform Program, Proposals for Reform: Paper No. 2, Fundraising", Commonwealth of Australia 1997. The Corporate Law Economic Reform Program Bill is currently being considered by the Australian Parliament.

back to the top

Consultation full index

Consultation index