The Private Capital Series | Marshall Sterling Investment Management

Module 10.2 · Financial Promotions

The previous article in this series explained what a financial promotion is and why the definition is broader than most founders expect. This article addresses a question that follows naturally from that: who does the restriction actually apply to, and why should you care if you are simply trying to raise money from investors for your business?

The short answers are: it applies to almost everyone involved in communicating about investments, and you should care because the consequences of getting it wrong fall on you personally as well as on your business.

The Scope of the Restriction

Section 21 of FSMA applies to any person who, in the course of business, communicates an invitation or inducement to engage in investment activity. There is no carve-out for small businesses, early-stage companies, first-time founders, or businesses raising capital in modest amounts. The restriction applies regardless of the size of the raise, the number of investors being approached, or the informality of the communication.

This is a point worth sitting with. The financial promotion regime is not reserved for large financial institutions or professional intermediaries. It applies to a sole founder sending a pitch deck from a personal email account just as it applies to an investment bank distributing a formal prospectus.

FCA-Authorised Persons

If you are FCA-authorised, you can communicate financial promotions in accordance with your permissions and the FCA’s rules on financial promotions set out in the Conduct of Business Sourcebook, known as COBS. Those rules require, among other things, that promotions are fair, clear and not misleading, that they are appropriately targeted, and that they contain certain mandatory disclosures depending on the type of investment being promoted.

Most founders and SME owners raising capital are not FCA-authorised. FCA authorisation is a significant undertaking: it requires a formal application, demonstration of fitness and propriety, adequate resources, appropriate systems and controls, and ongoing compliance obligations. It is not a realistic route for a business whose sole purpose in seeking authorisation would be to communicate about its own fundraise.

The practical routes available to unauthorised businesses are therefore the exemptions under the FPO and, where no exemption applies, approval by an authorised person.

Who Bears the Liability

This is where founders sometimes underestimate their exposure. The criminal liability under section 25 of FSMA attaches to the person who communicates the unlawful promotion. In the context of a founder-led business, that means you as an individual, not merely your company.

A company can also be liable, and in practice enforcement action may be taken against both the individual and the entity. But the individual dimension is significant. A conviction under section 25 carries a maximum sentence of two years imprisonment on indictment and an unlimited fine. Beyond the immediate penalties, a conviction would have serious consequences for any future regulated role, directorship, or professional position.

It is also worth noting that the liability is not limited to the person who drafts the communication. Anyone who approves and causes an unlawful financial promotion to be communicated may also be liable. If you are a co-founder, a director, or an adviser involved in the preparation and distribution of investor communications, the restriction applies to you too.

The Position of Intermediaries and Advisers

If you engage a corporate finance adviser, a fundraising consultant, or a placement agent to assist with your raise, their involvement does not automatically resolve your financial promotion risk. Unless they are FCA-authorised and are taking responsibility for approving the communications, their assistance does not transfer liability away from you.

Some advisers operating in the early-stage and SME market are not FCA-authorised. Others are authorised but do not hold the specific permission required since January 2024 to approve financial promotions for unauthorised businesses. Before engaging any intermediary in connection with investor outreach, you should establish clearly whether they are authorised, what their permissions cover, and whether they are willing and able to approve the communications you intend to make.

If an adviser is not authorised, or is authorised but cannot approve your promotions, their involvement does not resolve the section 21 problem. You remain responsible for ensuring that every communication you make either falls within an exemption or has been properly approved. Marshall Sterling Investment Management recommends founders obtain written confirmation from any adviser of exactly what financial promotion obligations they are and are not taking responsibility for.

The Position of Platforms and Introduction Services

A growing number of platforms exist that connect businesses seeking equity fundraising capital with potential investors. These include equity crowdfunding platforms, angel network platforms, and various online introduction services. Some are FCA-authorised and operate within a regulated framework. Others operate under specific exemptions or authorisation conditions that may or may not extend to the businesses that use them.

Using a platform does not automatically mean your communications are compliant. You should understand whether the platform’s authorisation or exemption covers the specific fundraising documents and communications you are making, or whether you need to take separate steps to ensure compliance. Many platforms address this in their terms of service, but the responsibility for understanding the position rests with you.

The Territorial Dimension

The section 21 restriction applies to communications originating in the United Kingdom and, in certain circumstances, to communications made from outside the UK that are capable of having an effect within it. If you are a UK-incorporated business communicating with investors based overseas, or a business with overseas operations communicating with UK-based investors, the territorial scope of the restriction is relevant.

A detailed analysis of cross-border financial promotion is beyond the scope of this article. The key point is that operating across borders does not remove the UK financial promotion restriction from the picture where UK investors or UK-based business activity is involved. If you are raising capital internationally, specific legal advice on the applicable regulatory framework in each jurisdiction is advisable.

Why the Restriction Exists

Understanding the purpose of the restriction helps you understand why it is applied as broadly as it is. The financial promotion regime exists to protect investors from misleading, inaccurate, or inappropriate communications that could lead them to make investment decisions they would not otherwise make. The asymmetry of information between a business seeking private investment and the individuals providing it is significant, particularly in private markets where there is no prospectus regime, no exchange listing, and limited independent scrutiny of the claims being made.

The regime does not assume that all founders are acting dishonestly. It assumes that investment decisions are consequential, that investors can suffer real financial harm from poor information, and that a baseline of regulatory oversight over how investments are communicated is in the public interest.

For founders, the practical implication is straightforward. The regime is not designed to obstruct legitimate startup fundraising or SME fundraising. The exemptions that exist, which are covered in the following articles, are specifically designed to allow genuine investment activity to proceed. The restriction is designed to ensure that activity happens through channels and in circumstances that provide investors with appropriate protections.

Working within the regime rather than around it is both the legally correct approach and, in practice, the more credible one. Investors who understand the regulatory framework, as many professional and experienced investors do, will notice whether you have approached the raise in a compliant manner. Those who have not will eventually find out why it matters.