EIS & Crowdfunding:

regulatory considerations

Alternative Investment Summit, November 2013

Gillian Roche-Saunders

• Increased focus on product design – FCA looking to use new powers and will be vigilant for regulatory arbitrage;

• Focus on the promotion of ucis unlikely to go away – 2 tier retail client structure will help;

• Direct promotion by product providers likely to become more difficult, particularly where an appropriateness assessment needs to be made;

• New requirements may lead to tension between marketing and compliance functions.

Summary this morning

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EIS options

Single company raise

Fund: UCIS

Discretionary managed portfolio

Fund: Non-UCIS

Shares allocated to investor

EIS options

• Least complex route

• Most likely to come across non-regulated options meaning less investor protections

• Challenges for article 3 MiFID advisers

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Single company raise

EIS options

• Investment manager will need permission to manage investments

• Likely to be a MiFID firm – useful if you are an article 3 exempt MiFID adviser

• Adviser charges will usually apply

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Single company raiseDiscretionary managed portfolio

EIS options

• Investment manager should have permission to manage AIFs• Adviser charges will usually apply• Investor may or may not be fund managers client• You will remain responsible for suitability

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Fund: UCIS Fund: Non-UCIS

Unregulated Collective Investment Scheme – UCIS

Non-mainstream Pooled Investment - NMPI

Alternative Investment Fund - AIF

Collective Investment Undertaking - CIU

Retail Investment Product - RIP

General EIS tips

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EIS will not be suitable for everyone

Sell the investment as well as the tax reliefs

Understand the EIS structures and select appropriate one

Our concern is that they may be marketed to consumers based primarily on the tax incentives offered, with investors not fully understanding the risks involved.

FSA Financial Promotions Industry Update, March 2011

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Crowdfunding options

unregulated

Investment based platformsequity and debt securities –

direct or indirect

Loan based platforms“peer to peer” loans

made to receive interest and repayment of capital

Rewardsbased

Non-financial reward

Donationsbased

Giving money in support

unregulated

regulated

regulated

Investment based crowdfunding

FCA Consultation Paper 13/13Direct offer financial promotion of shares or debt securities restricted to •Professional clients

•Sophisticated Investors (with a pre-assessment) *

•High Net Worth Investors (with a pre-assessment) *

•Retail investors receiving advice or managing services

•Retail investors who limit unlisted shares/ debt securities to 10% of their net investable portfolio *

* Appropriateness assessment is also required by the platform

If investment is packaged like a UCIS, the NMPI rules will apply.

Loans based crowdfunding

FCA Consultation Paper 13/13

•From April 2014 consumer credit will be regulated

•New RAO activity/ FCA permission: “operating an electronic system in relation to lending”

•Interim permission for firms with valid OFT licence

•Proposed that FSCS cover will not apply

•Websites and adverts would not yet be compliant

•Financial promotions rules will apply

Loans based crowdfunding

Some things to look out for when advising:

•Creditworthiness assessment process

•Rates of return post charges and default rates

•Tax implications of lending

•What protections and processes are in place for ‘late payments’, ‘defaults’ and early exits

General Crowdfunding tips

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Understand level of due diligence undertaken by platform

Social / ethical investment not exempt from rules

“Information asymmetry” risk mitigated by advice

Risk associated with unlisted companies remain

Check client money protections

Businesses at risk of lending money by way of business!