Questions we answer in this guide:
- Are you allowed to offer shares to the public?
- Do you need to issue a prospectus when asking for investment?
- How can you promote your investment opportunity?
So, you're hoping to raise investment for your business – exciting stuff! But before you start spreading the word, you'll need to learn about and comply with some key rules and regulations.
We’ve set out an overview of the rules below. We also highly recommend taking legal and tax advice in relation to any fundraising plans you may have.
If you’ve got a query, select our Speak to an Adviser feature. We’ll match you up with our experts and get you connected at a time to suit you.
Offering shares to the public – is it allowed?
If you’re a private limited company, UK company law prohibits you from offering your shares to the public.
But, the good news is that, under UK company law, an offer of shares won’t be considered an offer to the public if it falls within one of the following categories:
1. it's not calculated to result, directly or indirectly, in the shares of the company becoming available to anyone other than the person directly receiving the offer
2. the offer is a private discussion between the person receiving it and the person making it.
An offer will often fall within this second category if it's made to a person who has a connection with the company or with one of its founders (such as existing members and employees of the company and their families).
Ideally, any offer should be targeted at specific individuals (whether they're professional investors or friends and family) only, rather than the general public.
Do you need a prospectus when fundraising?
You might need one. And that would mean preparing formal documentation that must then be approved by the FCA.
However, startups raising less than 5,000,000 euros in any 12-month period, are exempt from this legal requirement.
Alternatively, you may also qualify for an exemption if you can demonstrate that:
1. you're making the offer to qualified investors only (such as venture capitalists, business angels and other persons regulated by the FCA)
2. your offer is made to or directed at less than 150 natural or legal persons, other than qualified investors
3. the minimum investment commitment that may be paid by any one person is 100,000 euros.
How can you promote your investment opportunity?
The rules that regulate how you promote your investment opportunity to potential investors are called the 'financial promotion rules'.
It’s a criminal offence to promote your small business for investment outside the scope of these rules.
No matter how small or new your business is, and regardless of the size of the investment opportunity you’re offering, these strict rules affect how you can tell people about what you’re offering (and what you’d like them to invest).
Whether you’re looking for investment from people within your circle of friends and general network, or you’re targeting more sophisticated investors and syndicates, the rules are also the same.
And these rules affect your investor packs, presentation materials, and any other communications (including emails, telephone calls, meetings, tweets and other social media posts) that you make as part of your fundraising efforts.
What's the reason for these rules?
The financial promotion rules exist to protect investors. When an investor acquires shares in a start-up company, there’s always a risk that they may lose their entire investment if the company isn’t successful.
And it’s for this reason that regulations have been developed to protect investors and restrict a company’s ability to prompt them to invest.
If you fail to comply with the law in this area, you’ll commit a criminal offence. Civil liabilities could also arise as well.
For example, if an investor later came to regret their investment decision, they may be entitled to claim their money back and compensation for any loss they may have suffered.
Directors may even find themselves personally liable to compensate the investor – or the company – if it was them that caused the company to break the law.
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