The Private Capital Series | Marshall Sterling Investment Management

Module 10.11 · Common Financial Promotion Errors

The previous articles in this module have explained what a financial promotion is, who the restriction applies to, and what exemptions are available. This article takes a different approach. Rather than working through the legal framework, it works through the mistakes.

The errors described here are drawn from the patterns that emerge from FCA enforcement activity, supervisory communications, and the practical experience of advising businesses on capital raising compliance. Understanding them is valuable not because you are likely to make all of them, but because recognising the pattern of thinking that leads to each one helps you identify and correct it before it becomes a problem.

Error One: Assuming Informality Means Immunity

The most pervasive error in early-stage fundraising is the belief that informal communications fall outside the financial promotion regime. Founders routinely treat casual emails, conversational messages, and verbal pitches as though they occupy a regulatory grey area that formal documents do not.

They do not. The section 21 restriction applies to any communication made in the course of business that invites or induces engagement with investment activity. The medium is irrelevant. The tone is irrelevant. The length is irrelevant. A three-line WhatsApp message asking someone whether they would be interested in investing in your company is capable of being a financial promotion just as much as a forty-page information memorandum.

Error Two: Treating Self-Certification as a Formality

The Article 50 and 50A self-certification processes exist for a reason. They are the mechanism by which you establish that the person you are communicating with is genuinely sophisticated or high net worth and has acknowledged the risks involved. When founders treat the certification as a box to be ticked rather than a genuine assessment, the protection it provides deteriorates significantly.

The most common manifestation of this error is asking everyone on an investor list to sign a certification form without any real engagement with whether they actually qualify. Some founders attach certification forms to initial investor outreach emails before any relationship has been established. Others obtain certifications from friends and family members who clearly do not meet the criteria. Others use outdated forms that do not meet the current prescribed requirements. A certification obtained in these circumstances is not worthless, but it is considerably weaker than one obtained through a genuine investor verification process.

Error Three: Misunderstanding the One-Off Exemption

Article 48 is discussed in detail earlier in this module. The error described here is specifically the assumption that communicating with investors individually and sequentially qualifies as a series of one-off communications.

It does not. If you are working through a list of fifty potential investors and sending each of them materially the same pitch deck, you are not making fifty one-off communications. You are distributing a single communication fifty times. The one-off condition requires genuine specificity: the communication must be tailored to the individual recipient and their circumstances in a way that distinguishes it from communications made to others.

Error Four: Publishing Investment Content Online Without Analysis

Website content, social media posts, and online articles that describe your business and its investment opportunity are financial promotions if they invite or induce engagement with investment activity. Publishing them on a publicly accessible platform without FCA authorisation or approval, and without an applicable exemption, is a breach of section 21.

The practical implication is that if you want to publish information about your equity fundraising online, you either need FCA authorisation, approval from an authorised firm with the investor gateway permission, or you need to ensure the content falls within an applicable exemption and is accessible only to those who qualify under it. Gating investment content behind a pre-investment gateway certification process is a common approach and, where properly implemented, can provide a workable framework. Simply publishing it publicly does not.

Error Five: Overstating Returns, Projections, and Prospects

Even where a communication is made under a valid exemption or with proper approval, its content must be fair, clear and not misleading. The most common content failures involve financial projections. Presenting hockey-stick revenue forecasts without adequate disclosure of the assumptions underlying them, describing projected returns without appropriate risk warnings, and presenting best-case scenarios as base-case expectations are all capable of making a communication misleading even if the underlying numbers are not fabricated.

The standard is not perfection. Projections are inherently uncertain and investors understand that. The standard is that the communication presents the investment fairly, discloses the material risks, and does not create impressions that the evidence does not support. A well-prepared three statement financial model with clearly disclosed assumptions and scenario analysis is considerably more defensible than an unmodelled revenue projection in a business plan for investors.

Error Six: Relying on Advisers Without Verifying Their Authority

Founders sometimes assume that because they have engaged a corporate finance adviser, a fundraising consultant, or a placement agent, compliance has been delegated to them. It has not, unless the adviser is FCA-authorised, holds the gateway permission, and has specifically agreed to approve the communications you are making.

Before placing any reliance on an adviser for financial promotion compliance, establish clearly whether they are authorised, check the FCA register to confirm their permissions, and get written confirmation of what they are and are not taking responsibility for. Verbal assurances from advisers that they will handle compliance are not a substitute for this analysis. Marshall Sterling Investment Management recommends founders keep a written record of all adviser authority checks as part of their raise compliance file.

Error Seven: Ignoring the Territorial Dimension

UK founders raising capital from overseas investors, and overseas founders raising capital from UK investors, sometimes proceed on the basis that the financial promotion regime does not apply to cross-border communications. This is incorrect in most circumstances.

The section 21 restriction applies to communications capable of having an effect within the UK. Cross-border fundraising also engages the regulatory requirements of other jurisdictions. The US securities laws, for example, have their own financial promotion equivalent in the form of the registration requirements under the Securities Act 1933 and the exemptions available under Regulation D and Regulation S. Raising capital from US investors without proper analysis of those requirements is a significant risk entirely separate from the UK position.

Error Eight: Failing to Maintain Records

Founders who have relied on the Article 50 or 50A exemptions frequently cannot demonstrate that they did so correctly because they have not retained copies of certifications, cannot confirm when communications were made, and have no record of the basis on which they considered the exemption conditions to have been met.

The record-keeping requirement is not technically onerous. A simple system that logs investor verification certifications with dates, records when each investor communication was sent, and notes the exemption relied upon for each category of communication is sufficient for most raises. The failure is almost always one of not doing it rather than not knowing how.

Error Nine: Assuming the Problem Goes Away After Closing

A final error worth addressing is the assumption that financial promotion compliance is a pre-investment issue that ceases to be relevant once investors have committed and the funding round has closed.

It does not. Post-investment communications to shareholders can themselves be financial promotions if they invite or induce further investment activity. Updates that describe the business in terms designed to encourage additional investment, communications about follow-on rounds, and shareholder reports that implicitly or explicitly invite further participation all require the same analysis as pre-investment communications. The section 21 restriction applies throughout the lifecycle of the investor relationship, not just at the point of initial engagement.