The basic prohibition
Under FSMA ((The Financial Services & Markets Act 2000 ("FSMA")) 2000 (s21(1) FSMA 2000), "A person must not, in the course of business, communicate an invitation or inducement to engage in investment activity."
The prohibition does not apply if:
- The person making the communication is authorised (s21(2)(a) FSMA 2000); or
- The communication is approved by an authorised person (s21(2)(b) FSMA 2000); or
- An exemption applies (s21(5) FSMA & The Financial Services & Markets Act 2000 (Financial Promotions)Order 2005 ("Financial Promotions Order")); or
- The inducement is not capable of having effect in the UK (s21(3) FSMA 2000).
What does this mean for Quoted Companies?
For the purposes of the financial promotions regime, quoted companies will typically be unauthorised persons as they do not have FSA permission to carry out regulated activities (s31(1)(a) FSMA 2000). Therefore if they are seeking investment, or thinking of doing something which could persuade somebody in the UK to invest, they will need to have the relevant communication approved by a firm which does have this type of authorisation, such as their NOMAD or sponsor.
What could constitute a financial promotion?
The law applies to any communication which is an invitation or inducement to engage in investment activity. The FSA considers that the restrictions apply to communications with a promotional element, not communications of a purely factual basis (Chapter 8 of the FSA's Perimeter Guidance Manual (PERG). The guidance in PERG is intended to represent the FSA’s views and although it does not bind the courts, it may be of persuasive effect). So a trading update, or the Chairman's statement will not typically be considered to be promotions, even if the effect of them is incidentally to encourage people to invest. However, if the underlying purpose is to encourage investment, care should be taken and the company should consult its corporate advisor as authorisation may be required.
What exemptions may apply?
There are some 70 exemptions in the Financial Promotion Order so it is beyond the scope of this guidance to describe every type of possible exemption. However, very broadly, the extent of the restrictions are proportional to the likely sophistication of the recipient.
A promotion targeted only at investment professionals (Art 19, FPO) or large companies (Art 49, FPO) would be exempt. In contrast and contrary perhaps to popular assumption, promotions by quoted companies targeted at high net worth individuals will not be exempt. There are limited exemptions for promotions to high net worths but not for fundraisings by quoted companies.
"Sophisticated investors" fall into two categories. There are those who have been certified by an authorised person (Art 50, FPO) and those who are self-certified (Art 50A, FPO). A quoted company could potentially make promotions to certified sophisticated investors relating to categories to which the investor had agreed to in advance. However, quoted companies could not make any sort of promotion to a self-certified sophisticated person without approval by an authorised person (Art 50A, PFO).
In practice though, any fundraising by a quoted company is likely to be based on an information memorandum approved by the company's nomad or sponsor.
What about announcements? Do quoted companies need to have them approved?
The purpose of the regime was not to overlap the heavily regulated rules with which a quoted company must comply but to ensure that people were not persuaded to invest inappropriately. Therefore the answer to this is almost always likely to be that approval is unnecessary for the purposes of the financial promotions regime. The content itself, as a factual non-promotional statement is unlikely to constitute a financial promotion (Chapter 8, PERG) and, even if it did, there are a host of exemptions which may apply, including:
- The announcement being accompanied by the annual accounts (Art 59, FPO);
- The promotion being required or permitted by market rules (Art 67, FPO);
- The announcement relating to the company's securities which have already been listed and not being an invitation to invest (Art 69, FPO).
In practice of course quoted companies are likely always to discuss proposed announcements with their advisors.
Are websites covered by these rules?
Yes. The medium of a website is considered not differently from any other methods of communication. Therefore the basic prohibition applies as do the various exemptions.
What other laws need to be considered?
Even if a communication is not a financial promotion, or is covered by an exemption, it perhaps goes without saying that if it is misleading, it may transgress a number of other laws. In respect of civil liability, these could include:
- the market abuse regime if, for example, there is behaviour which is likely to give a user of the market a false or misleading impression as to the supply or value of, or demand for, certain shares (s118(7) and (8), FSMA 2000);
- the case law applicable in respect of a fraudulent misrepresentation, where a false representation has been made knowingly or without belief in its truth or recklessly as to its truth (Derry v Peek (1889) App Case 337), or in respect of a negligent mis-statement, where an action can be invoked whether or not a contractual relationship exists (Hedley Byrne v Heller  AC 465Caparo Industries v Dickman  2 WLR 358, ADT v Binder Hamlyn  BCC 808, Royal Bank of Scotland plc v Bannerman Johnstone Maclay  CSIH);
- the Misrepresentation Act 1967 in respect of a statement in fact or law, if that statement is made negligently or even innocently (s2(1), Misrepresentation Act 1967); or
- an action for breach of contract, where a misleading statement forms the basis of a contract between a company or seller of shares and a subscriber or buyer of those shares.
Apart from possible civil liability, a person making a misleading communication may be criminally liable:
- for a misleading, false or deceptive statement, promise or forecast (whether made knowingly or recklessly) and for concealment of any material facts, if made in order to induce a person to enter or offer to enter or refrain to enter or refrain to offer to enter into a relevant agreement or exercise rights or refrain from exercising rights under a relevant investment (s397(2), FSMA 2000);
- for a false or misleading statement under the Theft Act 1968, if that person is an officer of a body corporate or unincorporated association (s19(1), Theft Act 1968); or
- under the Fraud Act 2006 for a failure to disclose information where there is a legal duty to disclose the information or where the person making the statement intends, by failing to disclose the information, to make a gain for himself or another or to cause loss to another or expose another to a risk of loss (s3, Fraud Act 2006).
Partner, Head of Corporate
Davies Arnold Cooper LLP
This article is intended as guidance only and cannot be relied on as definitive legal advice. Further information can be obtained from firstname.lastname@example.org.