Are You a Sophisticated Investor?

In March 2005, the rules relating to approaching people regarding financial promotions were relaxed so that so called ‘sophisticated investors’ and high net worth individuals (HNWIs) could be more easily approached with a view to making investments in unlisted securities. The purpose of the relaxation is to remove impediments to business angels and others seeking finance for small- to medium-sized businesses and to aid the seeking of informal venture capital generally.

It is possible to ‘self-certify’ yourself as a HNWI or a sophisticated investor. To self-certify as a HNWI you have to earn at least £100,000 per year or have net assets (excluding your property) of at least £250,000.

To self-certify as a sophisticated investor you must:

• have been a member of a business angels network for at least six months; or
• have made at least one investment in an unlisted security in the previous two years; or
• have worked in a professional capacity in the provision of finance to small- or medium-sized businesses in the last two years or in the provision of private equity; or
• be or have been within the last two years a director of a company with a turnover of at least £1m.

A promoter will need to have a ‘reasonable belief’ that the self-certification has occurred. The self-certification has to be in writing, but a promoter will be able to rely on a verbal assurance that a person has self-certified as a sophisticated investor or HNWI. When accepted as a HNWI or sophisticated investor, the protections available for investors as regards the promotion of securities by a person authorised under the Financial Services Act are removed. Appropriate ‘risk warnings’ must still be included in all promotional material given to potential investors. Whether this will prove to be sufficient protection for ‘self-certifiers’, or whether it will open the floodgates to the marketing of low-quality high-risk investments to them, remains to be seen.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.