Financial Promotions

Question 1

Structure for exam

Answer 1

1. Has there been an invitation or inducement to engage in investment activity made in the course of business (and originating/having effect in the UK? s21(1) FSMA
2. Was this communication made, or approved, by an authorised person - s21(2) FSMA)
3. Does it fall within an exemption in the FPO – s21(5) FSMA)?
4. Liability for breach and defences: s. 25(1); s. 400 FSMA
5. Defence: s.25(2) FSMA

Question 2

1. Has there been an invitation or inducement to engage in investment activity made in the course of business (and originating/having effect in the UK? s21(1) FSMA?

Answer 2

• Has there been an invitation or inducement to engage in investment activity made in the course of business (and originating/having an effect in the UK)? (s. 21(1) FSMA): financial promotion
• General prohibition: S.21(1) FSMA provides that an unauthorized person must not, in the course of business, communicate an invitation or inducement to engage in investment activity.

Question 3

2. Authorised person: s. 21(2) FSMA

Answer 3

Was this communication made, or approved, by an authorized person?

• S. 21(1) FSMA does not apply, however, if:
  a) that person is an authorised person; or
  b) the content of the communication is approved for the purposes of s.21 by an authorised person (s. 21(2) FSMA).

Question 4

1. Exemption in FPO 2005: s. 21(5) FSMA

Answer 4

Does it fall within an exemption in the FPO? (s.21(5) FSMA)
i) Articles 19, 47, 49 – Communications made to persons sufficiently expert to understand the risks involved
• Art 19 – professional or business investors
• Art 47 – financial press
• Art 49 – high net worth companies
The FCA believes this type of person does not need additional statutory protection.
ii) Article 48 – Certified high net-worth individuals
Non-real time or solicited real time communication to certified high net worth individuals may be exempt provided certain detailed conditions are satisfied.
iii) Article 50 – Sophisticated investors
All forms of communication to certified sophisticated investors are exempt, provided conditions in the Article are complied with
iv) Article 62 – Sale of a body corporate
All forms of communication relating to a transaction to acquire or dispose of a controlling interest in the shares of a company (i.e. more than 50% of the voting rights) or to acquire or dispose of shares which, when aggregated with existing shareholdings, take total shareholdings to a level which amounts to a controlling interest are exempt.
If transaction does not satisfy above but may reasonably be regarded as being the acquisition of day to day control of company, will also benefit from exemption
v) Article 70 – Promotions included in listing particulars
Non-real time communications included in an approved prospectus or supplementary prospectus or “any other document required or permitted to be published by ….. prospectus rules [i.e. the PRRs] under Part VI of the Act” are exempt
vi) Article 71 – Communications regarding offers of securities
Certain limited non-real time communications relating to a prospectus or supplementary prospectus offering transferable securities (whether listed or unlisted) are exempt. (The reference to a “public offer of unlisted securities” in the heading of Article 71 is misleading.)

Question 5

4. Liability for breach: s. 25/30/400 FSMA

Answer 5

• s.25(1) FSMA, a person who contravenes s.21(1) FSMA is guilty of an offence and is liable to a fine or imprisonment or both.
• s. 400 FSMA If the person making the communication is the issuer, then its directors may also be guilty of the offence, if the offence is shown to have been committed with the consent or connivance of the director concerned, or to be attributable to any neglect on his/her part.
• s. 30 FSMA - if a person enters into an agreement to acquire shares as a consequence of an unlawful communication, then that agreement will be unenforceable against them and they would be entitled to recover any money paid by them under the agreement and also compensation for any loss suffered: s. 30(2) FSMA.
  s. 30(4) FSMA gives the court the discretion to allow agreements concluded as a result of an unlawful communication to be enforced or money or property paid or transferred under the agreement to be retained if this would be just and equitable under the circumstances of the case.
• Note: remedies for misleading or inaccurate statements we have previously considered (e.g. s. 90A FSMA and Part 7 FS Act) may also apply to the relevant promotion.

Question 6

5. Defence

Answer 6

It is a defence under s.25(2) FSMA for a person to show that they:

i) believed, on reasonable grounds, that the content of the communication had been prepared, or approved for the purposes of s.21, by an authorised person; or
ii) took all reasonable precautions and exercised all due diligence to avoid committing the offence.