DBS

22 “With ‘crowd bonds’ being allowed in IFISAs, we see them rapidly gaining investor acceptance and mainstream status.” – Rohin Modasia, Property Crowd bringing about transactions in investments issued by the party seeking funding; making arrangements with a view to transactions in investments (which captures referral arrangements even where a specific issuer or investment is not identified); safeguarding and administering investments (custody) 21 ; and the platform may be considered by the FCA to be a multilateral trading facility, which carries additional regulatory obligations 22 . The operator of a platform offering crowdfunded bonds may also receive, hold and process money from investors or lenders on behalf of the company offering its shares or receiving loans. In these cases, the operator must also obtain client money permission from the FCA and comply with the rules and guidance in Chapter 7 of the FCA’s Client Assets Sourcebook (CASS). Alternatively, the operator will outsource client money handling activities to an appropriately authorised third party 23 . But the use of an independent security trustee or depositary (acting on behalf of the investors if the borrower violates certain conditions and enforcing the contract terms 24 ) is not compulsory unless the investment is deemed to be an Alternative Investment Fund, which is generally not the case with DBS investments 25 . However, the platform may appoint one to fulfil its duty of exercising rights under or in respect of the investment, if those rights involve taking control of some sort of security. The offer of shares, bonds or other securities generally constitutes a financial promotion and consequently, much of a crowdfunding website’s contents comprise an element of financial promotion. Accordingly, the contents of the website’s financial promotions must comply with the requirements of chapter 4 of the FCA’s Conduct of Business Sourcebook to ensure that they are clear, fair and not misleading 26 . Additionally, Section 21 of FSMA states that no financial promotion may be issued unless it is issued or approved by an FCA authorised person, normally the platform operator. This involves verification of the material by an authorised firm reviewing financial promotions associated with the bond, which requires the collection of evidential proof of all statements of fact within the document. The goal is for potential investors and those reviewing a document to be in a position to rely on its contents without having to independently check the facts. Since these activities have been regulated for some time, the advent of investment-based crowdfunding required little new legislation (unlike loan based crowdfunding) 27 . However, for consumer protection purposes, the categorisation of crowdfunded DBS as non-readily realisable securities in April 2014 brought with it changes to the rules in relation to their financial promotion. As a result, a financial promotion cannot be made to a retail investment audience unless the recipients have been categorised and that categorisation is one to which it is legal to promote direct offer financial promotions 28 . Where no professional advice has been provided, it is the responsibility of the platform to verify which, if any, of the categories an investor falls into. However, these rules only apply to direct offer financial promotions. These are promotions that contain an offer or invitation, and specify the manner of response or include a form by which a response can be made which can be as simple as a link to an online form. Promotions which do not specify how to respond are not caught by the restriction. A communication which simply gives marketing information about the promoter of an offer, or information about who can be invited to invest, would fall outside the scope of the rule, but an information memorandum or offer document containing an application form will be caught. Social media PROMOTIONAL RESTRICTIONS FOR NON-READILY REALISABLE SECURITIES CERTIFIED AS HIGH NET WORTH: annual income over £100,000 or net assets of £250,000* CERTIFIED OR SELF-CERTIFIED AS A SOPHISTICATED INVESTOR: sufficient knowledge to understand the risk CERTIFIED AS A RESTRICTED INVESTOR: investing less than 10% of net investible assets An authorised adviser has complied with the ‘suitability’ requirements in the FCA rules *Excluding primary residence, pension and insurance benefits