The return to the pre-31 January 2024 eligibility criteria for HNWI’s and sophisticated investors is to be welcomed. In this article we look at why the changes were so negatively received.
Under the heading “Delivering our plan for growth” the Chancellor of the Exchequer made the welcome announcement yesterday in the Spring Budget that the government will legislate to reinstate the previous eligibility criteria to qualify as a high net worth or sophisticated investor.
As a reminder why this is important: small and medium sized businesses do rely on being able to raise finance from high-net-worth investors and sophisticated angel investors. However, on general principles, such investment activity could fall within the definition of a financial promotion under the Financial Services and Markets Act 2000 (FSMA). In the absence of any exemption applying, financial promotion activity caught by FSMA is subject to strict rules and safeguards aimed at ensuring fairness, transparency and avoiding misleading information.
Fortunately, there has always been an exemption for:
which has meant that investment activity by these individuals does not fall to be regulated under FSMA.
On 31 January 2024, the qualification criteria to fall within the exemption changed, ostensibly to update outdated thresholds and modernise the criteria following advances in technology related to investment platforms. The effect of the changes is set out in the table.
| Category of Investor | Pre-31 January 2024 | Post-31 January 2024 |
| High Net Worth Individual |
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| Self-certified sophisticated investors are able to self-certify if one of the following are correct: |
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Note that the statement that an individual has made more than one investment in an unlisted company in the two years prior to certification was removed |
The changes had some quite disproportionate results. For example, although the increases in the HNWI thresholds were intended to reflect the impact of inflation, the pool of individuals meeting those thresholds reduced significantly thereby, overnight, reducing the number of angel investors able to claim exemption. In turn, this disqualified a number of would-be investors from being able to invest money into early-stage start-ups or investing in venture capital. The pre-31 January 2024 thresholds enabled friends and family to invest as HNWI’s and allowed individuals who just had some spare cash to invest to dip a toe in the water. These investors play a crucial role in bridging the gap between day 1 start up and the point at which venture capital becomes interested in investing in a business. Reducing that pool of investors has a significantly negative impact start-ups trying to scale up.
Female led businesses were also facing disproportionately reduced access to funding. Only 2% of venture capital funding goes to female founders, so in a smaller pool of investors, access to funding would be more difficult for those women.
Reversing these changes is very welcome both to investors and founders. The Spring Budget 2024 only states that the pre-31 January 2024 thresholds will be reinstated, and that legislation will be brought forward to achieve this. There is no indication as to the timing for this legislation.
There is one more sentence which we should heed, and it is: “[a]nd will also carry out further work to review the scope of the exemptions”. There is clearly a concern within Government around consumer protection and they want to do further work to understand if anything more is needed to protect investors when being approached to make investments. We hope that Government reaches their conclusions quickly. Certainty of the regime and its application is critical to opening the playing field fully and getting HNWI and sophisticated investors back in the game!
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