UK may relax private placement rules

The UK government’s forthcoming review of the Financial Services and Markets Act is to consider proposals to modify existing regulations on the marketing of shares in unlisted companies.

The UK government has announced plans to review the Financial Services and Markets Act 2000 (FSMA) as part of plans to review regulations governing the financial services industry. The review could impact the way shares in unlisted companies are marketed to investors.

The review of the act, which came into force in November 2001, was announced last month by Ruth Kelly, Financial Secretary. Among the key areas explored in the review is that the treasury will propose changes to the boundary of regulation, particularly with regard to capital raising from investors and, where possible, financial advice.

 

The FSA was created from a merger of ten bodies overseeing Britain's financial services sector, has been criticised for imposing additional burdens on companies. The new legislation is part of an attempt to simplify the authority’s bureaucratic structure and improve its approach to consumer protection.

 

Kelly said one of the elements the review would focus on is whether the regulations made under the FSMA on how shares in unquoted companies are marketed to potential private investors such as business angels are unnecessarily restrictive.

 

Under the existing regulations, such shares can only be marketed to investors defined as ‘high net worth individuals’ or ‘sophisticated investors’. A consultation is due to take place in January on whether further steps are possible to reduce requirements in this area.

 

Some market practitioners have expressed caution at the proposals. Simon Emary, a director of UK-based venture capital provider and business angel network Hotbed said: “While cutting down the red tape burden is generally a good thing, in the unquoted company investment arena there does need to be a certain level of protection for private investors. The classifications of ‘high net worth individual’ and ‘sophisticated investor’ at least provide some indication that the individual concerned has sufficient investment experience and capital behind him to take on the risk.”

 

“However, these definitions are already very broad, potentially encompassing quite a large number of people,” Emary added. “Our concern is that if the rules are relaxed, inexperienced people or those without the necessary funds to create a balanced portfolio or bear any losses could be marketed investments which are unsuitable for them.”

 

It is expected that the review will take around one year to complete.