Pre-budget plans are promising to boost private investment in unlisted companies, but there are concerns that there is not adequate protection for private investors.
According to the Treasury, from January next year individuals will be able to self certify that they are high net worth individuals or sophisticated investors in order to reduce the restrictions on the way investment opportunities in unquoted companies are promoted to private investors.
The current rules in The Financial Services and Markets Act 2000 (Financial Promotion) state: “To be certified as a high net worth individual, the individual concerned must have earned at least £100,000 or have held net assets to the value of more than £250,000 throughout the financial year before the date of the certificate.”
Under these rules, shares in unlisted companies could only be marketed to those who are certified by their accountant or employer as being high net worth or who are certified by an authorized person as being a sophisticated investor.
But private investor network Hotbed warns that private investor and business angel networks should work on improving professional standards rather than ducking regulatory hurdles. Adequate protection for private investors is particularly important because many intermediaries and networks operating in this arena are unregulated.
For example, networks that operate on a not-for-profit basis and so are not undertaking a regulated activity by way of business avoid the regulatory hurdle. As well as not having to go through the initial regulatory authorization process, which can be expensive and time consuming, they are also not required to have any professional indemnity insurance and are not subject to any minimum asset criteria.
This could put investors off, imposing yet another barrier to private investment.
Simon Emary, Hotbed director, says: “It will be interesting to see the detail on how the Government plans to balance the needs of growth companies looking for finance and protecting individuals who want to invest to help them maximize their potential.”
He adds: “Our experience is that individuals who enlist the help of a professional intermediary to help them invest in unlisted companies want the security of knowing that the intermediaries have been vetted by the regulator, and that they will continue to be so in the future.”