Looking at the upcoming changes to high net worth and sophisticated investor certifications coming into effect on 31 January 2024

As part of the Government’s attempt to reform and tighten the regulation of financial promotions, new certificates which include higher thresholds for those wishing to identify as a high net worth (HNW) individuals or sophisticated investors will be introduced from 31 January 2024.  

Fundraising from individuals is a commonly used practice, however certain exemptions/authorisations apply with the aim of protecting unwary investors. This short article will look at changes to the exemptions for the sale or issue of shares to HNW individuals and sophisticated investors in 2024.

What is the current position?

At the time of writing, the current thresholds to qualify as a HNW individual or sophisticated investor are:

HNW individual:

• Annual Income in excess of £100,000 p/a, or;
• net assets (excluding pension/primary residence) of £250,000.

Sophisticated investor:

• You have been a director of a company turning over at least £1,000,000 within the last two years.
• You have made more than one investment in an unlisted company in the last two years.
• You have been a member of a network or syndicate of business angels for at least six months.
• You have worked in the past two years in a professional capacity in the private equity sector or in the provision of finance for small and medium enterprises.

What are the changes? 

The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023[1] include several revisions/changes which are summarised below. 

The current thresholds have been in place since 2005 without amendment. The Government has noted significant economic, social, and technological changes as well as misuse of the exemptions as a motive behind the incoming changes.

1. Effective from 31 January 2024, a HNW individual and sophisticated investor will be defined as follows:

HNW individual

• Income of at least £170,000 in the previous financial year or;
• Net assets of at least £430,000 (excluding pension/primary residence).

Sophisticated Investor

• A party will no longer be able to rely on the existing provision that it had made investments in unlisted companies in the previous two years.
• An increase to £1,600,000 for annual turnover of a company in which a party has sat as a director within the last two years. 

There are a few further changes:

1. A requirement for businesses to provide their details in any communications using the exemptions.
2. Removal of ‘certified’ when referring to a HNW individual. 
3. The introduction of a revised, simplified form for HNW individuals and sophisticated investor statements. 

Other Comments

The changes have been met with mixed opinion, particularly, amongst those in the tech-based industries who have warned that the changes may dramatically reduce investment within the tech/start up sector. 

After nearly two decades, refresh of the current exemptions seemed inevitable. However for those very reliant on investment from HNW individuals and sophisticated investors (where investment is often highest just before the end of the tax year) the next few months might be uncomfortable.

If you have any questions in relation to the changes, please contact Helen Curtis or Prasan Modasia.

[1] The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023