A new regulated activity
Following on from our previous blog post, The Future of Prospectuses in the UK, the FCA has recently published its Engagement Paper 5 on a new Public Offer Platform regime (POP). The POP regime will introduce a new, more narrowly-defined, regulated activity specifically to cover the operation of a POP for the public offering of securities. The POP regime is being introduced as part of the wider public offers and admission to trading regime (POATR) to regulate large public offers that are made outside of regulated markets and multilateral trading facilities (MTFs), which are not subject to a prospectus requirement, bringing the activity within the FCA’s regulatory perimeter.
Currently, operating an investment-based, crowdfunding platform is regulated in the UK but not as a standalone regulated activity. Instead, activities related to investment-based crowdfunding are typically encapsulated by existing specified activities such as “arranging (bringing about) deals in investments” and “making arrangements with a view to transactions in investments”.
The Public Offer Platform (POP) regime
At present, the prospectus regime ensures that an FCA-approved prospectus is required when a company wishes to make a public offer or admit securities to trading on a regulated market. In contrast, there is relatively little regulation or oversight that applies to public offers made outside of the prospectus regime. The FCA has stated that “[s]eed funding and investment in early-stage companies are important components in the development of viable businesses”. Requiring such businesses to produce a prospectus when seeking seed/growth funding may be disproportionate and costly. However, such offers can pose significant risks, in particular to retail investors (e.g., fraudulent or highly speculative offers).
The POATR will introduce a new general prohibition on public offers of securities, subject to exceptions such as offers of securities admitted to trading on UK regulated markets or MTFs. The proposed POP regime will provide an exemption from the public offer restriction where an issuer is seeking a broad, “less sophisticated” investor base (i.e., a significant proportion of retail clients) and is seeking to raise more capital than permitted under a separate proposed exemption (i.e., raising capital over £5 million within a 12-month period). Offers above this threshold will need to be made through a POP unless another exemption applies.
The discussions concerning the POP regime will be of particular interest to investment-based crowdfunding and other platforms aimed at businesses seeking seed funding and growth capital that are largely directed at retail investors. However, the FCA is also interested to hear from others considering undertaking this activity with a focus on seeking capital from professional investors (e.g., scaling up beyond ‘seed’ funding).
Requirements on platform operators
The FCA’s engagement paper sets out its initial thinking on the rules for a POP. Overall, the FCA is aiming for a framework for POP operators that will ensure that:
- sufficient due diligence and checks on companies are conducted to prevent fraud and facilitate genuine capital raising, which will strengthen investor protection and support market integrity for such offers;
- investors have sufficient, accurate, and useful information, on both the company and the securities being offered, to understand the opportunity and risks when investing in securities on a platform; and
- companies can raise capital efficiently and effectively through such platforms, subject to appropriate scrutiny and transparency.
As a starting point, the proposed POP regime will impose requirements on POP operators in the following areas:
- due diligence requirements, including systems and controls to ensure that platform operators undertake appropriate due diligence on companies and prospective offers and that investors are clear about the due diligence that has been undertaken and the risks that remain;
- disclosure requirements for platform operators to provide or ensure a company provides key information to ensure that investors get the information they need to assess the securities;
- liability for, and the potential for redress from, platform operators; and
- the role of the Financial Services Compensation Scheme (FSCS).
The FCA intends to minimise the cost to companies and platforms where possible and to harness existing industry best practice and/or standards that are proportionate, while ensuring markets also work well for businesses seeking funding. The eventual framework will also need to be considered in light of the FCA’s new secondary objective of international competitiveness and growth.
Interaction with the new Consumer Duty
In July 2023, the FCA introduced a new Consumer Duty which has imposed obligations on firms in relation to their clients, and the requirements will also apply to operators of POPs. There are particular areas which the FCA identifies as being relevant to operators of POPs:
- providing timely, clear and visible information on the products and services offered on the platform;
- providing products and services that are right for their customers; and
- focussing on the individual needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction.
The FCA’s aim is that the interplay between the Consumer Duty and the POP regime will strengthen investor protection, produce more consistent consumer outcomes and facilitate smaller companies to raise capital whilst being subject to an appropriate amount of scrutiny and transparency.
What does this mean for existing platform operators?
Under the Public Offer Platform regime, liability for offers would primarily sit with platform operators who would be responsible for conducting proper due diligence and providing disclosure on offers hosted on their platform.
Under the current regulation of investment-based crowdfunding platforms, consumer protections for parts of the consumer journey are largely left to the discretion of platform operators to define, subject to general conduct rules such as those applying to financial promotions or arranging and dealing in investments.
However, for the more narrowly defined activity of operating a public offer platform”, the FCA’s initial view is that the best way to address the potential harms arising from the new activity is to maintain the current framework but augment it with additional rules which will focus on:
- due diligence performed by platforms in onboarding companies and assessing the securities to be offered; and
- information and disclosures designed to inform investors of the key features and risks associated with offers of ‘off-market’ securities, typically by smaller companies.
Where possible, the FCA proposes to continue to apply existing regulation as indicated in the table below.
Extract: Table 1: Current broad conduct rules associated with investment-based crowdfunding
Approach in new regime
Client (investor) onboarding
Ensure that the type of investment is appropriate for a client and that they understand the general features and risks associated with such securities
Existing appropriateness tests in COBS
Existing rules apply
Undertaking checks to ensure a business is legitimate
At the discretion of firms / Financial Promotion Rules
Undertake checks to ensure that communications comply with rules on content and disclosures
Discretion of firms /
The firm promotes the offer to its investor base
Discretion of firms /
Financial Promotions Rules
The firm will collect and process funds on behalf of the company
Existing Rules Apply
Existing rules apply
Other changes required
Currently, firms which communicate or approve direct offer financial promotions related to non-readily realisable securities (including crowdfunding platforms) are subject to the rules in COBS 4.12A, which include restrictions on incentives and requirements for risk warnings and cooling off periods. The FCA says it will need to consider how these rules will apply to offers made via POPs.
Further, as part of the FCA’s reform of the UK financial promotion regime, the FCA would expect a large proportion of operators of crowdfunding platforms to apply for, and be granted, permission to approve financial promotions under the new gateway.
In addition to the changes described above, the government may also need to consider if Part 20 of the Companies Act 2006 should be amended to clarify the meaning of a public offer and whether private limited companies must re-register as a public company before making any offers via a POP to avoid being in breach of the prohibition on public offers by private companies.
The FCA welcomes written responses to the engagement paper by 29 September 2023 and intends to gather views through focus groups with key trade associations and other relevant market participants and stakeholders later this year. Feedback on the engagement paper, and the other papers in the POATR series, is intended to create a dialogue which will inform further development of proposed rules, which the FCA will consult on formally during 2024.