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COBS 4.12B Promotion of non-mass market investments

Application

COBS 4.12B.1R

1This section applies to:

  1. (1)

    firms;

  2. (2)

    TP firms, to the extent that this section does not already apply to those TP firms as a result of GEN 2.2.26R; and

  3. (3)

    Gibraltar-based firms, to the extent that this section does not already apply to such a Gibraltar-based firm as a result of GEN 2.3.1R,

when approving or communicating financial promotions in relation to non-mass market investments.

COBS 4.12B.2G

1In addition to the persons listed in COBS 4.12B.1R, persons (including unauthorised persons) who benefit from a temporary exemption or exclusion from the general prohibition under:

  1. (1)

    Part 7 of the EU Exit Passport Regulations; or

  2. (2)

    Part 4 of the Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/1361),

are required to comply with the rules in this section as a consequence of:

  1. (3)

    regulation 59 of the EU Exit Passport Regulations; or

  2. (4)

    regulation 19 of the Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019.

COBS 4.12B.3R

1Throughout this section, references to a firm include a TP firm and a Gibraltar-based firm.

COBS 4.12B.4R

1This section does not apply to:

  1. (1)

    excluded communications; or

  2. (2)

    financial promotions to the extent that they relate to local authority securities.

Purpose and overview of the rules

COBS 4.12B.5G
  1. (1)

    1The rules in this section are intended to ensure that financial promotions relating to non-mass market investments are not communicated to ordinary retail investors. They do not apply to excluded communications, to financial promotions to the extent that they relate to local authority securities or to financial promotions insofar as they are directed at clients other than retail clients.

  2. (2)

    The rules in this section reflect the often complex and high-risk nature of non-mass market investments.

  3. (3)

    The rules in this section therefore restrict firms from approving or communicating financial promotions in relation to non-mass market investments which are addressed to, or disseminated in such a way that they are likely to be received by, a retail client, subject to certain exemptions.

  4. (4)

    The exemptions referred to in (3) are set out in COBS 4.12B.7R(5).

  5. (5)
    1. (a)

      Firms must also comply with COBS 4.12B.7R(1)(b) and the rules in COBS 4.12B.14R to COBS 4.12B.30R (see (b) below) where:

      1. (i)

        the financial promotion relates to a non-mass market investment; and

      2. (ii)

        the firm wishes to rely on exemptions 9 (certified high net worth investors), 10 (certified sophisticated investors) or 11 (self-certified sophisticated investors).

    2. (b)

      COBS 4.12B.7R(1)(b) and COBS 4.12B.14R to COBS 4.12B.31G cover:

      1. (i)

        preliminary assessment of suitability (in relation to exemptions 9 and 11);

      2. (ii)

        personalised risk warning, risk summary and cooling off period;

      3. (iii)

        risk warnings; and

      4. (iv)

        monetary and non-monetary incentives.

  6. (5A)

    COBS 4.12B.17R requires that a financial promotion which relates to a non-mass market investment does not offer to any retail client any form of incentive. The purpose of this rule is to ensure that retail clients are not persuaded or incited to engage in investment activity relating to a non-mass market investment other than by reference to the features of the investment activity that is the subject of the financial promotion.3

  7. (6)

    Where the financial promotion relates to a speculative illiquid security, firms must also comply with COBS 4.12B.32R, COBS 4.12B.33R and COBS 4.12B.35R which relate to the disclosure of costs, charges and commission.

  8. (7)

    The table below explains how the rules apply and to which non-mass market investments the rules apply, after the provisions in COBS 4.12B.4R have been applied.

  9. Handbook provision

    Description of the provision

    Which investments does the provision apply to

    When does the provision apply

    COBS 4.12B.6R

    Firms must not communicate or approve financial promotions in relation to non-mass market investments to retail clients

    All non-mass market investments other than units in unregulated collective investment schemes

    At all times.

    COBS 4.12B.7R(1)(b)

    Firms must carry out a preliminary assessment of suitability

    All non-mass market investments

    Before the financial promotion is communicated to a certified high net worth investor or self-certified sophisticated investor in reliance on the relevant exemption in COBS 4.12B.7R(5)

    COBS 4.12B.14R and COBS 4.12B.15R

    Firms must ensure that a personalised risk warning and summary of the risks is made available to the client and a period of at least 24 hours (the ‘cooling off period’) is applied before the financial promotion is communicated

    All non-mass market investments except for securities in a closed-ended investment fund (i) 2applying for, or with, a premium listing and (ii) 2which complies with the requirements of LR 15

    Before the financial promotion is communicated to a certified high net worth investor, self-certified sophisticated investor or certified sophisticated investor, in reliance on the relevant exemption in COBS 4.12B.7R(5)

    COBS 4.12B.17R

    Restrictions on monetary and non-monetary benefits being included within the financial promotions

    All non-mass market investments

    At the time the financial promotion is communicated to a certified high net worth investor, self-certified sophisticated investor or certified sophisticated investor, in reliance on the relevant exemption in COBS 4.12B.7R(5)

    COBS 4.12B.20R, COBS 4.12B.21R, COBS 4.12B.24R, and COBS 4.12B.26R

    Firms must ensure that a risk warning is provided to the client

    All non-mass market investments except for securities in a closed-ended investment fund (i) 2applying for, or with, a premium listing; and (ii) 2 which complies with the requirements of LR 15

    At the time the financial promotion is communicated to a certified high net worth investor, self-certified sophisticated investor or certified sophisticated investor, in reliance on the relevant exemption in COBS 4.12B.7R(5)

    COBS 4.12B.32R, COBS 4.12B.33R, and COBS 4.12B.35R

    Firms must ensure that statements disclosing all costs, charges and commission are provided to the client

    Only speculative illiquid securities

    At the time the financial promotion is communicated to a certified high net worth investor, self-certified sophisticated investor or certified sophisticated investor, in reliance on the relevant exemption in COBS 4.12B.7R(5)

  10. (8)

    There is guidance in COBS 4.12B.43G to 4.12B.45G on the application of the exemptions set out in the table in COBS 4.12B.7R(5).

Promotion of non-mass market investments

COBS 4.12B.6R
  1. (1)

    1A firm must not communicate or approve a financial promotion which relates to a non-mass market investment where that financial promotion is addressed to, or disseminated in such a way that it is likely to be received by, a retail client.

  2. (2)

    The restriction in (1) is subject to COBS 4.12B.7R and does not apply to units in unregulated collective investment schemes, which are subject to a statutory restriction on promotion in section 238 of the Act.

Exemptions from the restrictions on the promotion of non-mass market investments

COBS 4.12B.7R
  1. (1)

    1The restriction in COBS 4.12B.6R does not apply if the following conditions are met:

    1. (a)

      the financial promotion falls within an applicable exemption in the first column in the table in (5) because either:

      1. (i)

        it is made to, or directed at, only those recipients whom the firm communicating the financial promotion has taken reasonable steps to establish are persons in the second column of the table; or

      2. (ii)

        the firm approving the financial promotion has taken reasonable steps to establish that the financial promotion will be made to, or directed at, only those recipients who are persons in the second column of the table;

    2. (b)

      where the third column of the table refers to the need for a preliminary assessment of suitability, that assessment is undertaken before the financial promotion is made to or directed at the recipient;

    3. (c)

      the firm complies with the relevant rules in COBS 4.12B.14R to 4.12B.35R relating to the use of exemptions 9 (certified high net worth investors), 10 (certified sophisticated investors) or 11 (self-certified sophisticated investors), as provided by COBS 4.12B.7R(5).

  2. (2)

    For the purposes of COBS 4.12B.7R(1)(a), a firm will have taken reasonable steps to establish that the recipients of the financial promotion are persons in the second column of the table where the firm has:

    1. (a)

      obtained the relevant completed certificate from the retail client; and

    2. (b)

      satisfied itself that the retail client’s completion of the certificate evidences that the retail client meets the criteria to be certified as such.

  3. (3)

    Where a firm approves or communicates a financial promotion the preliminary assessment of suitability required by COBS 4.12B.7R(1)(b) must be undertaken by that firm.

  4. (4)

    A firm may rely on more than one exemption in relation to the same financial promotion.

  5. (5)

    Title of Exemption

    Promotion to:

    Promotion of non-mass market investment which is:

    Exemptions applicable to promotions of non-mainstream pooled investments only:

    1. Replacement products and rights issues

    A person who already participates in, owns, holds rights to or interests in, a non-mainstream pooled investment that is being liquidated or wound down or which is undergoing a rights issue. [See Note 1.]

    1. A non-mainstream pooled investment which is intended by the operator or manager to absorb or take over the assets of that non-mainstream pooled investment, or which is being offered by the operator or manager of that non-mainstream pooled investment as an alternative to cash on its liquidation;

    or

    2. Securities offered by the existing non-mainstream pooled investment as part of a rights issue.

    2. Enterprise and charitable funds

    A person who is eligible to participate or invest in an arrangement constituted under:

    (1) the Church Funds Investment Measure 1958 (available at www.legislation.gov.uk/ukcm/Eliz2/6-7/1/2014-01-01);

    (2) section 96 or 100 of the Charities Act 2011 (available at www.legislation.gov.uk/ukpga/2011/25/2014-01-01);

    (3) section 25 of the Charities Act (Northern Ireland) 1964 (available at www.legislation.gov.uk/apni/1964/33/section/25/2014-01-01);

    (4) the Regulation on European Venture Capital Funds (‘EuVECAs’) or the RVECA Regulation (‘RVECAs’); or

    (5) the Regulation on European Social Entrepreneurship Funds (‘EuSEFs’) or the SEF Regulation (‘SEFs’).

    Any non-mainstream pooled investment which is such an arrangement.

    3. Eligible employees

    An eligible employee, that is, a person who is:

    (1) an officer;

    (2) an employee;

    (3) a former officer or employee; or

    (4) a member of the immediate family of any of (1) – (3), of an employer which is (or is in the same group as) the firm, or which has accepted responsibility for the activities of the firm in carrying out the designated investment business in question.

    1. A non-mainstream pooled investment, the instrument constituting which:

    A. restricts the property of the non-mainstream pooled investment, apart from cash and near cash, to:

    (1) (where the employer is a company) shares in and debentures of the company or any other connected company; [See Note 2.]

    (2) (in any case), any property, provided that the non-mainstream pooled investment takes the form of:

    (i) a limited partnership, under the terms of which the employer (or connected company) will be the unlimited partner and the eligible employees will be some or all of the limited partners; or

    (ii) a trust which the firm reasonably believes not to contain any risk that any eligible employee may be liable to make any further payments (other than charges) for investment transactions earlier entered into, which the eligible employee was not aware of at the time he entered into them; and

    B. (in a case falling within A(1) above) restricts participation in the non-mainstream pooled investment to eligible employees, the employer and any connected company.

    2. Any non-mainstream pooled investment, provided that the participation of eligible employees is to facilitate their co-investment:

    (i) with one or more companies in the same group as their employer (which may include the employer); or

    (ii) with one or more clients of such a company.

    4. Members of the Society of Lloyd’s

    A person admitted to membership of the Society of Lloyd’s or any person by law entitled or bound to administer his affairs.

    A scheme in the form of a limited partnership which is established for the sole purpose of underwriting insurance business at Lloyd’s.

    5. Exempt Persons

    An exempt person (other than a person exempted only by section 39 of the Act (Exemption of appointed representatives) (available at www.legislation.gov.uk/ukpga/2000/8/section/39/2014-01-01) if the financial promotion relates to a regulated activity in respect of which the person is exempt from the general prohibition.

    Any non-mainstream pooled investment.

    6. Non-retail clients

    An eligible counterparty or a professional client.

    Any non-mainstream pooled investment in relation to which the client is categorised as a professional client or eligible counterparty. [See Note 4.]

    7. Solicited advice

    Any person.

    Any non-mainstream pooled investment, provided the communication meets all of the following requirements:

    (a) the communication only amounts to a financial promotion because it is a personal recommendation on a non-mainstream pooled investment;

    (b) the personal recommendation is made following a specific request by that client for advice on the merits of investing in the non-mainstream pooled investment; and

    (c) the client has not previously received a financial promotion or any other communication from the firm (or from a person connected to the firm) which is intended to influence the client in relation to that non-mainstream pooled investment [See Note 3.]

    8. US persons

    A person who is classified as a United States person for tax purposes under United States legislation or who owns a US qualified retirement plan.

    Any investment company registered and operated in the United States under the Investment Company Act 1940.

    Exemptions applicable to promotions of all non-mass market investments:

    9. Certified high net worth investor

    An individual who meets the requirements set out in COBS 4.12B.38R or a person (or persons) legally empowered to make investment decisions on behalf of such an individual.

    Any non-mass market investment the firm considers is likely to be suitable for that individual, based on a preliminary assessment of the client’s profile and objectives. [See COBS 4.12B.9G(2).]

    10. Certified sophisticated investor

    An individual who meets the requirements set out in COBS 4.12B.39R, including an individual who is legally empowered (solely or jointly with others) to make investment decisions on behalf of another person who is the firm’s client.

    Any non-mass market investment.

    11. Self-certified sophisticated investor

    An individual who meets the requirements set out in COBS 4.12B.40R, including an individual who is legally empowered (solely or jointly with others) to make investment decisions on behalf of another person who is the firm’s client.

    Any non-mass market investment the firm considers is likely to be suitable for that individual, based on a preliminary assessment of the client’s profile and objectives.

    [See COBS 4.12B.9G(2)].

    The following Notes explain certain words and phrases used in the table above.

    Note 1

    Promotion of non-mainstream pooled investments to a category of person includes any nominee company acting for such a person.

    Note 2

    A company is ‘connected’ with another company if:

    they are both in the same group; or

    one company is entitled, either alone or with another company in the same group, to exercise or control the exercise of a majority of the voting rights attributable to the share capital, which are exercisable in all circumstances at any general meeting of the other company or of its holding company.

    Note 3

    A person is connected with a firm if it acts as an introducer or appointed representative for that firm or if it is any other person, regardless of authorisation status, who has a relevant business relationship with the firm.

    Note 4

    In deciding whether a promotion is permitted under the rules of this section or under section 238 of the Act, firms may use the client categorisation regime that applies to business other than MiFID or equivalent third country business. (This is the case even if the firm will be carrying on a MiFID activity at the same time as or following the promotion.)

COBS 4.12B.8R

1A firm may communicate an invitation or inducement to participate in an unregulated collective investment scheme without breaching the restriction on promotion in section 238 of the Act if the promotion falls within an exemption in the table in COBS 4.12B.7R(5) and is in accordance with COBS 4.12B.7R(1).

Advice and preliminary assessment of suitability

COBS 4.12B.9G
  1. (1)

    1Where a firm communicates any promotion of a non-mass market investment in the context of advice, it should have regard to and comply with its obligations under COBS 9 or 9A (as applicable). Firms should also be mindful of the appropriateness requirements in COBS 10 and 10A which apply to a wide range of non-advised services.

  2. (2)
    1. (a)

      The effect of COBS 4.12B.7R(1)(b) is that where a firm wishes to rely on exemptions 9 (certified high net worth investors) or 11 (self-certified sophisticated investors), as provided by COBS 4.12B.7R(5), the preliminary assessment of suitability must be undertaken before promotion of the non-mass market investment is made to or directed at clients (in addition to other requirements). Where a firm approves or communicates a financial promotion the preliminary assessment of suitability must be undertaken by that firm as required by COBS 4.12B.7R(3).

    2. (b)

      There is no duty to communicate the preliminary assessment of suitability to the client. If the firm does so, it must not do so in a way that amounts to making a personal recommendation unless it complies with the rules in COBS 9 or 9A (as applicable) on suitability.

    3. (c)

      The requirement for a preliminary assessment of suitability does not extend to a full suitability assessment, unless advice is being offered in relation to the non-mass market investment being promoted, in which case the requirements in COBS 9 or 9A apply (as applicable). However, it requires that the firm takes reasonable steps to acquaint itself with the client’s profile and objectives in order to ascertain whether the non-mass market investment under contemplation is likely to be suitable for that client. The firm should not promote the non-mass market investment to the client if it does not consider it likely to be suitable for that client following such preliminary assessment.

Promotions to certified high net worth investors, certified sophisticated investors or self-certified sophisticated investors

COBS 4.12B.10R
  1. (1)

    1COBS 4.12B.10R to COBS 4.12B.31G apply to financial promotions which:

    1. (a)

      relate to non-mass market investments ; and

    2. (b)

      are communicated, or are to be communicated, to certified high net worth investors, certified sophisticated investors or self-certified sophisticated investors for the purposes of the exemptions in COBS 4.12B.7R(5).

  2. (2)

    A firm may only rely on exemptions 9 (certified high net worth investors), 10 (certified sophisticated investors) or 11 (self-certified sophisticated investors) to:

    1. (a)

      communicate a financial promotion to which this rule applies if the firm has complied with the rules in COBS 4.12B.14R to COBS 4.12B.35R, as appropriate; or

    2. (b)

      approve for communication a financial promotion to which this rule applies if the firm is satisfied that the rules in COBS 4.12B.14R to COBS 4.12B.35R, as appropriate, will be satisfied in relation to each communication of the financial promotion.

  3. (3)

    The conditions in COBS 4.12B.14R (personalised risk warning) and COBS 4.12B.15R (cooling off period) do not need to be satisfied if the retail client has previously received a financial promotion relating to a non-mass market investment from the same person as would otherwise need to satisfy them.

COBS 4.12B.11G

1Where a firm is relying on exemptions 9 (certified high net worth investors), 10 (certified sophisticated investors) or 11 (self-certified sophisticated investors), in accordance with COBS 4.12B.7R(1)(a), it must first take reasonable steps to establish that the retail client falls into one of those categories and then the firm must undertake a preliminary assessment of suitability in accordance with COBS 4.12B.7R(1)(b), where relevant. Once a firm has completed these steps, it must comply with the rules in COBS 4.12B.14R to COBS 4.12B.35R.

COBS 4.12B.12G

1The effect of COBS 4.12B.10R(3) and related provisions in this section is that a personalised risk warning and cooling off period are only required on the first occasion that a firm, or other person communicating a financial promotion, communicates a financial promotion relating to a non-mass market investment to a particular retail client.

Risk summaries

COBS 4.12B.13R

1Where a rule in this section requires a firm to communicate a risk summary selected from COBS 4 Annex 1R, the firm must either:

  1. (1)

    provide the risk summary as it appears in COBS 4 Annex 1R; or

  2. (2)

    provide a version of the risk summary in COBS 4 Annex 1R in appropriately amended form, provided that:

    1. (a)

      the firm has a valid reason for each amendment;

    2. (b)

      the firm makes a record of each amendment and the reason for it;

    3. (c)

      any alternative or additional text is in plain English; and

    4. (d)

      the amended risk summary does not take longer than around 2 minutes to read.

COBS 4.12B.13AG

1For the purposes of COBS 4.12B.13R(2), the following reasons are considered to be valid:

  1. (1)

    the relevant part of the risk summary in COBS 4 Annex 1R would be misleading in relation to the particular investment;

  2. (2)

    the relevant part of the risk summary in COBS 4 Annex 1R would be irrelevant in relation to the particular investment;

  3. (3)

    the risk summary in COBS 4 Annex 1R does not include a risk that is relevant to the particular investment, and it is appropriate for that further risk to be included;

  4. (4)

    the sole purpose of the relevant statement in the risk summary is to include a hyperlink to a webpage and the medium of communication does not permit the incorporation of a link.

This list is not exhaustive.

Prior conditions for communication to certified high net worth investors, certified sophisticated investors or self-certified sophisticated investors

COBS 4.12B.14R
  1. (1)

    1The first condition is that before communicating the financial promotion, the firm, or other person communicating the financial promotion:

    1. (a)

      obtains the retail client’s full name; and

    2. (b)

      having obtained the retail client’s name, communicates to that retail client the following personalised risk warning:

      [Client name], this is a high-risk investment. How would you feel if you lost the money you’re about to invest? Take 2 mins to learn more.

  2. (2)

    If the financial promotion is, or is to be, communicated by means of a website, mobile application or other digital medium, the personalised risk warning in (1)(b) must:

    1. (a)

      be clearly brought to the retail client’s attention by means of a pop-up box (or equivalent);

    2. (b)

      include a link which, when activated, delivers an appropriate risk summary in a further pop-up box (or equivalent):

      1. (i)

        relating to the type of non-mass market investment that is the subject of the financial promotion; and

      2. (ii)

        selected from COBS 4 Annex 1R; and

    3. (c)

      be accompanied by an invitation to the retail client to specify whether they wish to:

      1. (i)

        leave the investment journey; or

      2. (ii)

        continue to receive the financial promotion.

  3. (3)

    If the financial promotion is, or is to be, communicated other than by means of a website, mobile application or other digital medium:

    1. (a)

      the personalised risk warning in (1)(b) must be:

      1. (i)

        provided to the retail client omitting the words “Take 2 mins to learn more”; and

      2. (ii)

        accompanied by an appropriate risk summary in a durable medium relating to the type of non-mass market investment that is the subject of the financial promotion selected from COBS 4 Annex 1R; and

    2. (b)

      the retail client must then be invited to specify whether they wish to:

      1. (i)

        leave the investment journey; or

      2. (ii)

        continue to receive the financial promotion.

  4. (4)

    The options in 2(c) and (3)(b) must be presented with equal prominence.

  5. (5)

    The condition is only satisfied if the retail client specifies that they wish to continue to receive the financial promotion.

  6. (6)

    This rule does not apply to a financial promotion of a closed-ended investment fund applying for, or with, a premium listing and which complies with the requirements of LR 15.

  7. (7)

    The personalised risk warning required by (2)(a) and the risk summary required by (2)(b) must comply with COBS 4.12B.28R and COBS 4.12B.30R.

  8. (8)

    The risk summary required by (3)(a)(ii) must comply with COBS 4.12B.24R and COBS 4.12B.26R.

COBS 4.12B.15R
  1. (1)

    1The second condition applies if a retail client requests to view a financial promotion of a non-mass market investment (including of a security in a closed-ended investment fund applying for, or with, a premium listing and which complies with the requirements of LR 15).

  2. (2)

    The second condition is that, before communicating the financial promotion, the firm or other person communicating the financial promotion:

    1. (a)

      allows a period of at least 24 hours (the ‘cooling off period’) to elapse;

    2. (b)

      following the lapse of time in (a), invites the retail client to specify whether they wish to:

      1. (i)

        leave the investment journey; or

      2. (ii)

        continue to receive the financial promotion; and

    3. (c)

      the retail client specifies that they wish to continue to receive the financial promotion.

  3. (3)

    The options in (2)(b) must be presented with equal prominence.

COBS 4.12B.16G

1COBS 4.12B.15R does not prevent the person who is subject to it from engaging with the retail client during the cooling off period. This includes for the purposes of providing the client with the personalised risk warning required by COBS 4.12B.14R and obtaining the information necessary to undertake the preliminary assessment of suitability required by COBS 4.12B.7R(1)(b).

Restrictions on monetary and non-monetary incentives

COBS 4.12B.17R
  1. (1)

    1A firm must not communicate or approve a financial promotion which relates to a non-mass market investment and which offers to a retail client any monetary or non-monetary incentive3.

  2. (2)

    The rule in (1) does not apply to a product or service produced or provided by the person, or a member of the group of the person, who will benefit from the proceeds of the investment.

  3. (3)

    The rule in (1) does not apply where the incentive is:3

    1. (a)

      offered for the exclusive purpose of encouraging a retail client to transfer their existing holding of one or more non-mass market investments from an existing arrangement with one person to a different arrangement with another person; and3

    2. (b)

      not structured in such a way as to encourage further investment in any non-mass market investment.3

COBS 4.12B.18G

1For the purposes of COBS 4.12B.17R monetary and non-monetary incentives include, but are not limited to:

  1. (1)

    offering bonuses when investing in a non-mass market investment3;

  2. (2)

    offering bonuses where the client refers another person;

  3. (3)

    offering cashback when investing in a non-mass market investment;

  4. (4)

    offering discounts or rebates on fees paid that are linked to volumes of trades made3 in non-mass market investments;

  5. (5)

    offering free gifts once an investment in a non-mass market investment has been made such as laptops or mobile telephones; or

  6. (6)

    offering any additional free investments or offering discounts on investments.

COBS 4.12B.19G
1
  1. (1)

    Information and research tools do not constitute non-monetary incentives.3

  2. (2)

    Lower fees or charges not linked to volumes of trades, made available to all retail clients, do not constitute a monetary incentive.3

  3. (3)

    The effect of COBS 4.12B.17R(3) is that a financial promotion may offer an incentive to transfer an existing holding of a non-mass market investment (for example, from one platform to another). However, the incentive must relate solely to the transfer and must not be used to encourage retail clients to otherwise engage in investment activity in relation to non-mass market investments.3

COBS 4.12B.19AG

3Subject to COBS 4.12B.18G and COBS 4.12B.19G, the following factors are relevant in determining whether a benefit is an incentive:

  1. (1)

    A benefit which is intrinsically connected with the investment or investment activity that is the subject of the financial promotion is unlikely to constitute an incentive – for example, voting rights which are carried by a share. However, a benefit which is entirely separable from the investment or investment activity that is the subject of the financial promotion is likely to be an incentive.

  2. (2)

    A benefit which is only available for a fixed period of time, or is contingent upon investing in a non-mass market investment in the future, is likely to constitute an incentive. This would not include, for example, a benefit which is offered in connection with a specified event such as the first close of an investment.

  3. (3)

    A benefit which is only available to retail clients who invest through a particular medium is likely to constitute an incentive – for example, a benefit which is only offered to retail clients who invest via a social media link.

COBS 4.12B.19BG
  1. (1)

    3COBS 4.12B.17R applies irrespective of the nature of the investment activity. This means that the rule applies not only in relation to incentives to buy non-mass market investments but also, for example, to incentives to enter into agreements for the purposes of transacting in non-mass market investments.

  2. (2)

    The rationale for offering the incentive is immaterial. This means that the rule applies to incentives which are intended, for example, to encourage retail clients to make investments ahead of the end of the tax year.

Risk warning to be included in the financial promotion

COBS 4.12B.20R

1A firm must not communicate or approve a financial promotion which relates to a non-mass market investment unless it contains a risk warning that complies with COBS 4.12B.21R.

COBS 4.12B.21R
  1. (1)

    1For the purposes of COBS 4.12B.20R the financial promotion must contain the following risk warning:

    Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.

  2. (2)

    Where the number of characters contained in the risk warning in (1) exceeds the number of characters permitted by a third-party marketing provider, the following risk warning must be used:

    Don’t invest unless you’re prepared to lose all the money you invest.

  3. (3)

    Where the financial promotion is, or is to be, communicated by way of a website, mobile application or other digital medium:

    1. (a)

      the risk warning in (1) or (2) must also include a link:

      1. (i)

        in the form of the text: Take 2 mins to learn more; and

      2. (ii)

        which, when activated, delivers an appropriate risk summary in a pop-up box (or equivalent) relating to the type of non-mass market investment that is the subject of the financial promotion selected from COBS 4 Annex 1R;

    2. (b)

      the link required by (3)(a) need not be:

      1. (i)

        in the form required by 3(a)(i) if the inclusion of that additional text would exceed the number of characters permitted by a third-party marketing provider;

      2. (ii)

        provided if the medium of communication does not allow the incorporation of a link.

  4. (4)

    Where the financial promotion is communicated other than by way of a website, mobile application or other digital medium (and including where the financial promotion is a real time financial promotion), the risk warning in (1) must be:

    1. (a)

      provided:

      1. (i)

        in a durable medium; or

      2. (ii)

        if the medium of communication means that the risk warning cannot be provided in a durable medium, in a manner appropriate to the medium of communication; and

    2. (b)

      however the financial promotion is communicated, accompanied by an appropriate risk summary in a durable medium relating to the type of non-mass market investment that is the subject of the financial promotion selected from COBS 4 Annex 1R.

  5. (5)
    1. (a)

      A firm must omit the words “and you are unlikely to be protected if something goes wrong” from the risk warning required by (1) if the conditions in (b) apply.

    2. (b)

      The conditions are that:

      1. (i)

        the financial promotion relates to an investment:

        1. (A)

          that is issued by; or

        2. (B)

          the provision of which involves a,

        participant firm or an appointed representative of a participant firm; and

      2. (ii)

        the activity of the person in (i) is of a type that could give rise to a protected claim.

    3. (c)

      A firm that omits the words in (a) must make a record of the basis on which the conditions in (b) are met.

  6. (6)

    This rule does not apply to a financial promotion of a closed-ended investment fund applying for, or with, a premium listing and which complies with the requirements of LR 15.

  7. (7)

    The risk warning required by (1) or (2) and the risk summary required by (4)(b) must comply with COBS 4.12B.24R and COBS 4.12B.26R.

  8. (8)

    The risk summary required by (3)(a)(ii) must comply with COBS 4.12B.28R and COBS 4.12B.30R.

COBS 4.12B.22G
  1. (1)

    1Reference in COBS 4.12B.21R(5)(b)(i)(B) to the ‘provision’ of an investment is to a person developing, managing or packaging an investment such as an operator. It does not refer to persons involved in distributing, or intermediating the sale of, an investment such as a financial adviser or a person arranging investments.

  2. (2)

    A firm relying on COBS 4.12B.21R(5) should consider obtaining external legal advice (from legal advisers with relevant expertise and experience) on the appropriateness of omitting the words in that rule from a risk warning. Any such advice should be recorded as part of the firm’s compliance with COBS 4.12B.21R(5)(c).

COBS 4.12B.23G

1Even where it is not possible to provide a risk warning in a durable medium (for example, because the financial promotion is a real time financial promotion), the recipient of the financial promotion must still be provided with an appropriate risk summary in a durable medium at or around the time that the financial promotion is communicated (COBS 4.12B.21R(4)).

Requirements of risk warnings and non-digital risk summaries

COBS 4.12B.24R
  1. (1)

    1The relevant risk warning in COBS 4.12B.21R(1) or (2) and the relevant risk summaries in COBS 4.12B.14R(3)(a)(ii) and COBS 4.12B.21R(4)(b) must:

    1. (a)

      be prominent, taking into account the content, size and orientation of the financial promotion as a whole;

    2. (b)

      except where the risk warning cannot be provided in writing, be clearly legible, contained within its own border and with bold and underlined text as indicated in COBS 4.12B.21R or COBS 4 Annex 1R.

  2. (2)

    The relevant risk warning in COBS 4.12B.21R(1) or (2) must, if the financial promotion is, or is to be, communicated by means of a website or mobile application:

    1. (a)

      be statically fixed and visible at the top of the screen, below anything else that also stays static, even when the retail client scrolls up or down the webpage; and

    2. (b)

      be included as described in (a) on each linked webpage on the website or page on the application relating to the non-mass market investment.

COBS 4.12B.25G

1The FCA expects firms to take account of the latest version of the international Web Content Accessibility Guidelines (WCAG) accessibility standard when designing how the risk warning will be displayed: https://www.w3.org/WAI/WCAG21/quickref/

COBS 4.12B.26R

1The financial promotion must not contain any design feature which has the intent or effect of reducing the visibility or prominence of the risk warning or risk summary.

[Note: The FCA has also issued non-Handbook guidance on prominence in financial promotions. See https://www.fca.org.uk/publication/finalised-guidance/fg-fin-proms-prominence.pdf]
COBS 4.12B.27G

1For the purposes of COBS 4.12B.26R, design features which might reduce the visibility or prominence of a risk warning or risk summary include, but are not limited to:

  1. (1)

    using a font size for the risk warning or risk summary that is smaller than the standard size used in the financial promotion;

  2. (2)

    using a background colour that does not sufficiently contrast the text or makes it difficult for the client to read the text;

  3. (3)

    fading the text of the risk warning or risk summary;

  4. (4)

    placing the risk warning or risk summary at the bottom of the promotion or embedding it within other standard information, for example legal information or the firm’s contact details;

  5. (5)

    requiring additional links to be clicked in order for the full text of the risk warning to be seen;

  6. (6)

    using a font or background in the risk warning or risk summary in the same colours as the firm’s brand, or using a font or background in the same colours as the rest of the financial promotion; and

  7. (7)

    using a font or background in the risk warning or risk summary in the same colour as other forms of disclosure and standard information; the colour of the font and background should distinguish the risk warning or risk summary from other forms of information.

Requirements of digital personalised risk warnings and digital risk summaries

COBS 4.12B.28R

1The relevant personalised risk warning in COBS 4.12B.14R(2) and the relevant risk summaries in COBS 4.12B.14R(2)(b) and COBS 4.12B.21R(3)(a)(ii) must be:

  1. (1)

    prominently brought to the retail client’s attention, taking into account the content, size and orientation of the financial promotion as a whole;

  2. (2)

    clearly legible, contained within its own border and with bold and underlined text as indicated in COBS 4.12B.14R(1)(b) and COBS 4 Annex 1R;

  3. (3)

    statically fixed and visible in the middle of the screen; and

  4. (4)

    the main focus of the screen.

COBS 4.12B.29G

1The FCA expects firms to take account of the latest version of the international Web Content Accessibility Guidelines (WCAG) accessibility standard when designing how the personalised risk warning or risk summary will be displayed: https://www.w3.org/WAI/WCAG21/quickref/

COBS 4.12B.30R

1The financial promotion must not contain any design feature which has the intent or effect of reducing the visibility or prominence of the personalised risk warning or risk summary.

[Note: The FCA has also issued non-Handbook guidance on prominence in financial promotions. See https://www.fca.org.uk/publication/finalised-guidance/fg-fin-proms-prominence.pdf]
COBS 4.12B.31G

1For the purposes of COBS 4.12B.30R, design features which might reduce the visibility or prominence of a personalised risk warning or risk summary include, but are not limited to:

  1. (1)

    using a font size for the personalised risk warning or risk summary that is smaller than the standard size used in the financial promotion;

  2. (2)

    using a background colour that does not sufficiently contrast the text or makes it difficult for the retail client to read the text;

  3. (3)

    fading the text of the personalised risk warning or risk summary;

  4. (4)

    placing the personalised risk warning or risk summary at the bottom of the promotion or embedding it within other standard information, for example legal information or the firm’s contact details;

  5. (5)

    requiring additional actions to be taken by the retail client, such as requiring additional links to be clicked in order for the full text of the personalised risk warning or risk summary to be seen;

  6. (6)

    using a font or background in the risk warning in the same colours as the firm’s brand, or using a font or background in the same colours as the rest of the financial promotion; and

  7. (7)

    using a font or background in the risk warning in the same colour as other forms of disclosure and standard information; the colour of the font and background should distinguish the personalised risk warning or risk summary from other forms of information.

Further requirement to include a statement of costs, charges and commission where the financial promotion relates to speculative illiquid securities

COBS 4.12B.32R

1A firm must not communicate or approve a financial promotion which relates to a speculative illiquid security to, or for communication to, a retail client unless it contains statements that comply with COBS 4.12B.33R.

COBS 4.12B.33R

1For the purposes of COBS 4.12B.32R, the financial promotion must contain:

  1. (1)

    a statement which expresses as a percentage the total amount of the capital raised by the issue of the speculative illiquid security which will be paid out in costs, fees, charges and commissions and other expenses to any third party;

  2. (2)

    a statement which expresses as a cash sum the percentage referred to in (1) above; and

  3. (3)

    in addition to the statements in (1) and (2) above, a statement which provides a breakdown of the actual or potential expenditure to be paid out of an investor’s capital and details of the third party (or parties) who will receive it.

COBS 4.12B.34G
  1. (1)

    1There is an illustration of how a firm should comply with COBS 4.12B.33R(2) in (2) below.

  2. (2)

    Where a firm pays 30% of the total amount of capital raised by the issue of speculative illiquid securities towards costs, fees, charges and commissions and other expenses to any third party, the statement should say: “For every £100 you invest, £30 will be paid to third parties to meet costs, fees, charges and commissions.

COBS 4.12B.35R

1The statements providing the percentage figure in COBS 4.12B.33R(1) and the cash sum in COBS 4.12B.33R(2) must:

  1. (1)

    be prominent;

  2. (2)

    be contained together within their own border and with bold text;

  3. (3)

    immediately follow the most prominent reference to the expected return on the speculative illiquid security; an

  4. (4)

    be published so that they are clearly legible against a neutral background.

COBS 4.12B.36G

1The statement providing the breakdown of expenditure in COBS 4.12B.33R(3) should be included in the financial promotion in a clear and prominent way.

COBS 4.12B.37G

1The purpose of the statements required by COBS 4.12B.33R is to enable an investor to consider the proportion of capital raised by an issue of a speculative illiquid security that will not be invested. This information should help the investor to assess the risk that the issuer will be unable to pay any advertised interest payments, other income or otherwise to repay the investor’s capital at maturity.

Definition of sophisticated and high net worth investors

COBS 4.12B.38R

1A certified high net worth investor is an individual who has completed and signed, within the period of twelve months ending on the day on which the communication is made, a statement in the terms set out in COBS 4 Annex 2R, and whose completion of the statement indicates that they meet the relevant criteria to be categorised as such.

COBS 4.12B.39R

1A certified sophisticated investor is an individual:

  1. (1)

    who has a written certificate signed within the last 36 months by a firm confirming they have been assessed by that firm as sufficiently knowledgeable to understand the risks associated with engaging in investment activity in non-mass market investments; and

  2. (2)

    who has completed and signed, within the period of twelve months ending on the day on which the communication is made, a statement in the terms set out in COBS 4 Annex 3R, and whose completion of the statement indicates that they meet the relevant criteria to be categorised as such.

COBS 4.12B.40R

1A self-certified sophisticated investor is an individual who has completed and signed, within the period of twelve months ending on the day on which the communication is made, a statement in the terms set out in COBS 4 Annex 4R, and whose completion of the statement indicates that they meet the relevant criteria to be categorised as such.

COBS 4.12B.41G

1Where the financial promotion will relate to more than one type of non-mass market investment, the retail client may sign a combined statement that meets the requirements in COBS 4 Annex 2R to COBS 4 Annex 4R, as applicable, in respect of each type of non-mass market investment to which the financial promotion will relate.

COBS 4.12B.42R

1A firm must not:

  1. (1)

    influence, or seek to influence, the information that a retail client provides when completing a certificate for the purposes of COBS 4.12B.38R to COBS 4.12B.40R; or

  2. (2)

    encourage a retail client to complete a further certificate in the event that a client’s signed certificate indicates that they do not meet the criteria to be categorised as a certified high net worth investor, certified sophisticated investor or self-certified sophisticated investor, as applicable.

Sophisticated and high net worth investors: guidance on certification by authorised person and reliance on self-certification

COBS 4.12B.43G
  1. (1)

    1A firm which wishes to rely on any of the certified high net worth investor exemptions (see Part I of the Schedule to the Promotion of Collective Investment Schemes Order, Part I of Schedule 5 to the Financial Promotion Order and COBS 4.12B.38R) should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should take reasonable steps to ascertain that the retail client does, in fact, meet the income and net assets criteria set out in the relevant statement for certified high net worth investors.

  2. (2)

    In addition, the firm should consider whether the promotion of the non-mass market investment is in the interests of the retail client and whether it is fair to make the promotion to that client on the basis that the client is a certified high net worth investor, having regard to the generally complex nature of non-mass market investments. A retail client who meets the criteria for a certified high net worth investor but not for a certified sophisticated investor may be unable to properly understand and evaluate the risks of the non-mass market investment in question.

COBS 4.12B.44G
  1. (1)

    1A firm which is asked to or proposes to assess and certify a retail client as a certified sophisticated investor (see article 23 of the Promotion of Collective Investment Schemes Order, article 50 of the Financial Promotion Order and COBS 4.12B.39R) should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should carry out that assessment with due skill, care and diligence, having regard to the generally complex nature of non-mass market investments and the level of experience, knowledge and expertise that the retail client being assessed must possess in order to be fairly and reasonably assessed and certified as a sophisticated investor.

  2. (2)
    1. (a)

      For example, a retail client whose investment experience is limited to mainstream investments such as regularly traded securities issued by listed companies, life policies or units in regulated collective investment schemes (other than qualified investor schemes) is generally unlikely to possess the requisite knowledge to adequately understand the risks associated with investing in non-mass market investments.

    2. (b)

      In exceptional circumstances, however, the retail client may have acquired the requisite knowledge through means other than their own investment experience, for example, if the retail client is a professional of several years’ experience with the design, operation or marketing of complex investments such as options, futures, contracts for differences or non-mass market investments.

COBS 4.12B.45G
  1. (1)

    1A firm which wishes to rely on any of the self-certified sophisticated investor exemptions (see Part II of the Schedule to the Promotion of Collective Investment Schemes Order, Part II of Schedule 5 to the Financial Promotion Order and COBS 4.12B.40R) should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should consider whether the promotion of the non-mass market investment is in the interests of the client and whether it is fair to make the promotion to that client on the basis of self-certification.

  2. (2)

    For example, it is unlikely to be appropriate for a firm to make a promotion under any of the self-certified sophisticated investor exemptions without first taking reasonable steps to satisfy itself that the investor does in fact have the requisite experience, knowledge or expertise to understand the risks of the non-mass market investment in question. A retail client who meets the criteria for a self-certified sophisticated investor but not for a certified sophisticated investor may be unable to properly understand and evaluate the risks of a non-mass market investment.

One-off promotions

COBS 4.12B.46G
  1. (1)

    1A firm which wishes to rely on one of the one-off promotion exemptions provided by the Promotion of Collective Investment Schemes Order or the Financial Promotion Order to promote a non-mass market investment to a retail client should have regard to its duties under the Principles and the client’s best interests rule. In particular, the firm should consider whether the financial promotion of the non-mass market investment is in the interests of the client and whether it is fair to make the financial promotion to that client on the basis of a one-off promotion exemption.

  2. (2)

    The one-off promotion exemptions permit the promotion of investments to clients under certain conditions (see PERG 8.14.3G to PERG 8.14.13G for guidance on the scope of the one-off exemptions in the Financial Promotion Order). Firms should note that, in the FCA’s view, promotion of a non-mass market investment to a retail client who is not a certified high net worth investor, a certified sophisticated investor or a self-certified sophisticated investor is unlikely to be appropriate or in that client’s best interests.

Qualified investor schemes

COBS 4.12B.47G
  1. (1)

    1A firm which wishes to promote units in a qualified investor scheme to a retail client in circumstances where the firm considers the financial promotion to be an excluded communication (see COBS 4.12B.4R(1)) should have regard to its duties under the Principles and the client’s best interests rule.

  2. (2)

    As explained in COLL 8.1, qualified investor schemes are intended only for professional clients and retail clients who are sophisticated investors. Firms should note that, in the FCA’s view, promotion of units in a qualified investor scheme to a retail client who is not a certified sophisticated investor or a self-certified sophisticated investor is unlikely to be appropriate or in that client’s best interests.

COBS 4.12B.48G

[deleted.]2

Electronic documents

COBS 4.12B.49G

1In this section:

  1. (1)

    any requirement that a document is signed may be satisfied by an electronic signature or electronic evidence of assent; and

  2. (2)

    any references to writing should be construed in accordance with GEN 2.2.14R and its related guidance provisions.

Definition of speculative illiquid security

COBS 4.12B.50R

1Subject to COBS 4.12B.52R to COBS 4.12B.54R, a speculative illiquid security is a debenture or preference share which:

  1. (1)

    has a denomination or minimum investment of less than £100,000 (or an equivalent amount as defined in COBS 4.12B.51R); and

  2. (2)

    has been issued, or is to be issued, in circumstances where the issuer or a member of the issuer’s group uses, will use or purports to use some or all of the proceeds of the issue directly or indirectly for one or more of the following:

    1. (a)

      the provision of loans or finance to any person other than a member of the issuer’s group;

    2. (b)

      buying or acquiring specified investments (whether they are to be held directly or indirectly);

    3. (c)

      buying or acquiring investments other than specified investments (whether they are to be held directly or indirectly);

    4. (d)

      buying real property or an interest in real property (whether it is to be held directly or indirectly);

    5. (e)

      paying for or funding the construction of real property.

COBS 4.12B.51R

1For the purposes of COBS 4.12B.50R(1):

  1. (1)

    an equivalent amount in relation to an amount denominated in any currency other than sterling is an amount of equal value denominated wholly or partly in another currency; and

  2. (2)

    the equivalent amount is to be calculated at the latest practicable date before (but in any event not more than three business days before) the date of the issue of debentures or preference shares.

COBS 4.12B.52R

1A debenture or preference share that does not otherwise fall within COBS 4.12B.50R is not a speculative illiquid security by virtue only of the fact that the proceeds of the issue are used to buy or acquire specified investments as part of the ordinary cash management activities or treasury functions of an issuer (or its group) carrying on a general commercial or industrial purpose as defined in COBS 4.12B.54R(1).

COBS 4.12B.53R

1For the purposes of COBS 4.12B.50R, and notwithstanding the exemption for readily realisable securities in COBS 4.12B.54R(3)(d), a debenture is also a speculative illiquid security if:

  1. (1)

    it meets the conditions set out in COBS 4.12B.50R; and

  2. (2)

    it:

    1. (a)

      is admitted to official listing on an exchange in the United Kingdom or an EEA State; and

    2. (b)

      is not regularly traded on or under the rules of such an exchange; or

  3. (3)

    it:

    1. (a)

      is a newly issued debenture which can be reasonably expected to be admitted to official listing on an exchange in the United Kingdom or an EEA State; and

    2. (b)

      cannot reasonably be expected to be regularly traded on or under the rules of such an exchange when it begins to be traded.

COBS 4.12B.54R

1A debenture or preference share is not a speculative illiquid security where one or more of the exemptions in (1), (3) or (4) below applies.

  1. (1)

    This exemption applies where:

    1. (a)

      the issuer or a member of the issuer’s group uses the proceeds of the issue for the purpose of the activities in COBS 4.12B.50R(2)(c) (buying or acquiring investments other than specified investments), (d) (buying real property or an interest in real property) or (e) (paying for or funding the construction of real property); and

    2. (b)

      the relevant property or investment is or will be used by the issuer or a member of the issuer’s group for a general commercial or industrial purpose which it carries on.

  2. (2)

    The exemption in (1) will not apply in respect of a debenture or preference share within COBS 4.12B.50R(2)(d) or (e) if the ability of the issuer to pay in relation to the debenture or preference share:

    1. (a)

      any coupon or other income; and/or

    2. (b)

      capital at maturity,

    is wholly or predominantly linked to, contingent on, highly sensitive to, or dependent, on a return generated as a result of the matters referred to in COBS 4.12B.50R(2)(d) or (e).

  3. (3)

    This exemption applies where the debenture or preference share is:

    1. (a)

      issued, or to be issued, by a credit institution;

    2. (b)

      issued, or to be issued, by an investment trust;

    3. (c)

      a non-mainstream pooled investment;

    4. (d)

      a readily realisable security except for a debenture within COBS 4.12B.53R; or

    5. (e)

      a P2P agreement.

  4. (4)

    This exemption applies where:

    1. (a)

      the issuer is:

      1. (i)

        a property holding vehicle; or

      2. (ii)

        a single-company holding vehicle;

    2. (b)

      any financial promotions made relating to the investment comply with COBS 4.12A as appropriate; and

    3. (c)

      any financial promotion made relating to a single-company holding vehicle clearly and prominently states which single company the investment relates to.

COBS 4.12B.55R
  1. (1)

    1For the purposes of COBS 4.12B.54R(1)(b), a general commercial or industrial purpose includes the following:

    1. (a)

      a commercial activity, involving the purchase, sale and/or exchange of goods or commodities and/or the supply of services; or

    2. (b)

      an industrial activity involving the production of goods; or

    3. (c)

      a combination of (a) and (b).

  2. (2)

    For the purposes of COBS 4.12B.54R(1)(b), a general commercial or industrial purpose does not include:

    1. (a)

      investment to generate a pooled return;

    2. (b)

      property development or construction services; and

    3. (c)

      hiring, leasing or rental services.

Guidance on general commercial or industrial purpose

COBS 4.12B.56G
  1. (1)

    1COBS 4.12B.50R provides that a debenture or preference share will fall within the definition of a speculative illiquid security where the proceeds of the issue are to be used by the issuer or a member of the issuer’s group to fund various activities including buying or acquiring investments (other than specified investments) or the buying or construction of real property.

  2. (2)

    However, COBS 4.12B.54R(1) provides an exemption in cases where the investments (other than specified investments) that are bought or acquired, or the property which is bought or constructed are or will be used by the issuer or a member of the issuer’s group for a general commercial or industrial purpose which it carries on.

  3. (3)

    General commercial or industrial purpose is defined in COBS 4.12B.55R.

  4. (4)

    The effect of the exemption in COBS 4.12B.54R(1) is that a debenture or preference share will not be a speculative illiquid security where the proceeds of the issue are used by the issuer or a member of the issuer’s group to buy or acquire investments (other than specified investments), or to buy or construct real property, and the relevant investments or property are or will be used by the issuer or group member for the purposes of its own commercial or industrial activities. This is illustrated in the examples in (5) and (6) below.

  5. (5)

    In relation to COBS 4.12B.50R(2)(c) (buying or acquiring investments other than specified investments):

    1. (a)

      where a company issues a debenture or preference share and uses the proceeds to purchase IT equipment for use in its business, to the extent that the IT equipment might be considered an investment, the debenture or preference share will benefit from the exemption because the IT equipment is used by the company for its own commercial activities (in this case, for use by its staff to provide services to customers);

    2. (b)

      where a supermarket chain issues a debenture or preference share and uses the proceeds to purchase stock (for example wine) for sale as part of its retail business, to the extent that the wine might be considered an investment, the debenture or preference share will benefit from the exemption because the wine is used by the supermarket for its own commercial activities (in this case, to sell it on to its retail customers for a profit);

    3. (c)

      where a company issues a debenture or preference share and uses the proceeds to buy or acquire art or fine wine as an investment, it will not benefit from the exemption because the art or fine wine will not be used by the company itself for its own commercial activities; if the art or fine wine is used to generate a pooled return, then the exemption would also not apply as a result of COBS 4.12B.55R(2)(a); and

    4. (d)

      where a company issues a debenture or preference share and uses the proceeds to purchase IT equipment for the purpose of hiring or leasing those out to another company, it will not benefit from the exemption because it is not using the IT equipment for its own commercial activities and hiring and leasing services are excluded from the definition of general commercial or industrial purpose as a result of COBS 4.12B.55R(2)(c).

  6. (6)

    In relation to COBS 4.12B.50R(2)(d) or (e) (buying or constructing real property):

    1. (a)

      where a retailer issues a debenture or preference share and uses the proceeds to build a shop, the debenture or preference share will benefit from the exemption because the property is used by the retailer for its own commercial activities (in this case, the sale of goods);

    2. (b)

      where a property developer issues a debenture or preference share and uses the proceeds to fund the costs of a property development or construction of property, which is intended to be sold or rented out for commercial purposes or as residential dwellings, it will not benefit from the exemption because the development will not be used by the developer itself, and property development and construction services are excluded from the definition of general commercial or industrial purpose (see COBS 4.12B.55R(2)(b));

    3. (c)

      where a company issues a debenture or preference share to fund the costs of constructing a power station which the company intends to operate itself with a view to selling the electricity it produces, the debenture or preference share will benefit from the exemption (unless COBS 4.12B.54R(2) applies). That is because it will use the property for its own commercial or industrial activities (generating electricity). However, firms should also consider COBS 4.12B.54R(2) and the guidance in (7) below.

  7. (7)

    COBS 4.12B.54R(2) provides that the general commercial or industrial purposes exemption does not apply where the ability of the issuer to pay the coupon or other income or to repay capital on maturity in relation to the debenture or preference share is wholly or predominantly linked to, contingent on, highly sensitive to, or dependent on, a return generated as a result of the matters referred to in COBS 4.12B.50R(2)(d) or (e) (buying or construction of real property).

  8. (8)

    The effect of the above is that where a company issues a debenture or preference share for the purpose of buying real property, an interest in real property or funding the construction of a particular project and the company’s ability to pay interest on the debenture or preference share or repay capital depends on the success of that purchase or project, the exemption in COBS 4.12B.54R(1) will not apply. In those circumstances, the debenture or preference share will be a speculative illiquid security unless one of the other exemptions in COBS 4.12B.54R applies.