COBS 4.14 Restrictions on the promotion of speculative illiquid securities to retail clients

2This section applies to:

1. (1)

   firms;

2. (2)

   TP firms; and

3. (3)

   Gibraltar-based firms,

when approving or communicating financial promotions in relation to speculative illiquid securities.

Throughout this section:

1. (1)

   References to firm include references to a Gibraltar-based firm.

2. (2)

   Gibraltar-based firm has the same meaning as in the Gibraltar Order.

3This section does not apply to a financial promotion to the extent that it relates to a local authority security.

1. (1)

   A firm or a TP firm must not communicate or approve a financial promotion in relation to a speculative illiquid security 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 4.14.6R.

Subject to COBS 4.14.5R and COBS 4.14.6R, a firm or TP firm must not communicate or approve a financial promotion which relates to a speculative illiquid security unless it contains:

1. (1)

   a risk warning that complies with COBS 4.14.8AR3;

2. (2)

   if applicable, the date on which the financial promotion was approved; and

3. (3)

   statements that comply with COBS 4.14.12R disclosing all costs, charges and commission.

1. (1)

   3The relevant risk warning in COBS 4.14.8AR(1) or (2) and the relevant risk summary in COBS 4.14.8AR(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 4.14.8AR or COBS 4 Annex 1R.

2. (2)

   The relevant risk warning in COBS 4.14.8AR(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 speculative illiquid security.

3The 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]

3The risk summary in COBS 4.14.8AR(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 Annex 1R;

3. (3)

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

4. (4)

   the main focus of the screen.

3The financial promotion must not contain any design feature which has the intent or effect of reducing the visibility or prominence of the 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]

3Where 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.

For the purposes of COBS 4.14.8R(3) 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.

The statements providing the percentage figure in COBS 4.14.12R(1) and the cash sum in COBS 4.14.12R(2) must be:

1. (1)

   prominent;

2. (2)

   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; and

4. (4)

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

A certified high net worth investor is an individual who has signed, within the period of twelve months ending on the day on which the communication is made, a statement in the following terms:

“HIGH NET WORTH INVESTOR STATEMENT

I make this statement so that I can receive promotional communications which are exempt from the restriction on promotion of speculative illiquid securities. The exemption relates to high net worth investors and I declare that I qualify as such because at least one of the following applies to me:

I had, throughout the financial year immediately preceding the date below, an annual income to the value of £100,000 or more. Annual income for these purposes does not include money withdrawn from my pension savings (except where the withdrawals are used directly for income in retirement).

I held throughout the financial year immediately preceding the date below, net assets to the value of £250,000 or more. Net assets for these purposes do not include:

1. (a)

   the property which is my primary residence or any money raised through a loan secured on that property; or

2. (b)

   any rights of mine under a qualifying contract of insurance; or

3. (c)

   any benefits (in the form of pensions or otherwise) which are payable on the termination of my service or on my death or retirement and to which I am (or my dependants are), or may be, entitled; or

4. (d)

   any withdrawals from my pension savings (except where the withdrawals are used directly for income in retirement).

I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on speculative illiquid securities.

Signature:

Date:

A certified sophisticated investor is an individual who:

1. (1)

   has a written certificate signed within the last 36 months by a firm or TP firm confirming they have been assessed by that firm or TP firm as sufficiently knowledgeable to understand the risks associated with engaging in investment activity in speculative illiquid securities; and

2. (2)

   has signed, within the period of twelve months ending with the day on which the communication is made, a statement in the following terms:

   “SOPHISTICATED INVESTOR STATEMENT

   I make this statement so that I can receive promotional communications which are exempt from the restriction on promotion of speculative illiquid securities. The exemption relates to certified sophisticated investors and I declare that I qualify as such.

   I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on speculative illiquid securities.

   Signature:

   Date: ”

A self-certified sophisticated investor is an individual who has signed, within the period of twelve months ending with the day on which the communication is made, a statement in the following terms:

“I declare that I am a self-certified sophisticated investor for the purposes of the restriction on promotion of speculative illiquid securities. I understand that this means:

1. (i)

   I can receive promotional communications made by a person who is authorised by the Financial Conduct Authority which relate to investment activity in speculative illiquid securities;

2. (ii)

   the investments to which the promotions will relate may expose me to a significant risk of losing all of the property invested.

I am a self-certified sophisticated investor because at least one of the following applies:

1. (a)

   I am a member of a network or syndicate of business angels and have been so for at least the last six months prior to the date below;

2. (b)

   I have made more than one investment in an unlisted company in the two years prior to the date below;

3. (c)

   I am working, or have worked in the two years prior to the date below, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises;

4. (d)

   I am currently, or have been in the two years prior to the date below, a director of a company with an annual turnover of at least £1 million.

I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from someone who specialises in advising on speculative illiquid securities.

Signature:

Date: ”

For the purposes of this section, and subject to COBS 4.14.22R to COBS 4.14.24R, 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 4.14.21R); 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.

For the purposes of COBS 4.14.20R(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.

A debenture or preference share that does not otherwise fall within COBS 4.14.20R 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 4.14.24R(1).

For the purposes of COBS 4.14.20R, and notwithstanding the exemption for readily realisable securities in COBS 4.14.24R(3)(d), a debenture is also a speculative illiquid security if:

1. (1)

   it meets the conditions set out in COBS 4.14.20R; 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.

A 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 4.14.20R(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 4.14.20R(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 4.14.20R(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 4.14.23R; 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 4.7.7R to COBS 4.7.12G 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.

1. (1)

   For the purposes of COBS 4.14.24R(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 4.14.24R(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;

   3. (c)

      hiring, leasing or rental services.