DBS

23 “It is becoming increasingly clear that clients are looking outside of traditional fixed income securities towards other asset classes that can provide them with a reliable source of income.” – Investment Association, Asset Management Survey 2016 REGULATORY SUMMARY: CROWDFUNDING PLATFORMS INVESTOR CATEGORISED Before any potential retail investor can see any specific information on a DBS offering which invites them to invest and gives them the means to do so, that investor must be categorised as one of four types of investor. INFORMATION APPROVED If this is achieved, all information provided to the qualified potential investor must be approved for financial promotional purposes, by a person authorised by the FCA. This includes all of the marketing information and the methods by which it is to be distributed including information memorandums, prospectus, offer documents, social media and websites. PROSPECTUS If the offer involves transferable securities, the offering will fall under the regulation of the EU Prospectus Directive, whereby a detailed prospectus with specified content, including proscribed financial information must be supplied. NO PROSPECTUS If the offer is for transferable securities where the raise limit for that 12-month period is less than €5 million or is for non-transferable securities, no prospectus is required. There is no requirement to produce financial statements and they aren’t subject to the same intense scrutiny as securities caught by the Prospectus Directive. Nevertheless, the information provided to potential investors must be fair, clear and not misleading and a person authorised by the FCA must confirm this by approving it as a financial promotion. campaigns promoting projects that issue equity and debt securities on a crowdfunding platform generally fall within the scope of the rules because they normally include a link to the campaign page, where a direct investment can be made 29 . Offers of transferable securities frequently require a prospectus. The prospectus is an investor focused document that enables access to formal capital markets for private companies. It must contain a summary, a registration document containing information about the issuer, and a securities note containing information about the securities being offered or admitted to trading. The EU Prospectus Directive specifies the minimum information to be included with different requirements for different types of securities and the document must also be approved by the UK Listing Authority. It is therefore costly and time consuming to produce, requiring considerable expertise, making it less than ideal for Small and Medium Sized Enterprises (SMEs) 30 . The legal costs alone of preparing a compliant prospectus tend to start at around £40,000 to £60,000, which is unsustainable for the relatively low raises of £1 million to £5 million which generally characterise these types of debt based securities. It’s therefore fortuitous for this market, which generally consists of fairly small offerings of transferable DBS raising less than €5 million per 12 months, that they benefit from an exemption to the requirement to produce a prospectus. There is still a requirement, however, that the investment documentation is signed off by an FCA authorised entity (usually the regulated platform), under section 21 of the FSMA. It should also be noted that, unlike the UKLA, the regulated platform which arranges investments into DBS is required to continue be involved thereafter. “The robust performance of debt securities compared to equities since the Global Financial Crisis has reminded investors of the importance of debt securities in helping reduce volatility in a balanced portfolio.” – Steve Lambert, NAB SOURCE: INTELLIGENT PARTNERSHIP The entity which arranges or makes the sale of the DBS must be FCA authorised to do so, or be the appointed representative of a firm with the relevant FCA permissions.