Introduction (and is that a regulated activity…..)
In a heavily finance oriented jurisdiction like Gibraltar, one of the key activities that keeps the entrepreneurial spirit going and economic activity thriving, is the introduction of capital by persons to potential investments.
It is unrealistic to expect that all such introductions can be made through regulated entities (there are simply too few compared to the number of active business people in Gibraltar), so it is vital for business people here to understand the law around how far one can go when making introductions without inadvertently engaging in regulated activities.
In order for introducers based in Gibraltar to assist in facilitating connections, securing the financing of projects, and ultimately participating in the success of those investments - whether by taking equity or a fee - it is essential to structure activities in a manner that avoids falling within the scope of regulated activities under the Financial Services Act 2019.
Seed investments in the UK, either via the popular EIS or the earlier stage SEIS, reached £2BN and £157M respectively in 2022 alone. It is reasonable to assume that amongst the Gibraltar market it would be proportionately more per capita and, of course, you cannot ignore the obvious links between the UK and Gibraltar – those introductions of capital can easily occur cross border regardless of Gibraltar’s regulatory alignment with the UK, so the potential size of the market for Gibraltar based introducers is of course, enormous.
Angel investing is vital to a thriving start up community, more so in a place the size of Gibraltar. We will leave the current lack of tax incentives in Gibraltar in that regard for a later article, the focus of this article is to explore – when it comes to unregulated introducers, what activities fall within the regulatory perimeter in Gibraltar and what falls outside. This requires an understanding of the regulatory prohibition on ‘arranging deals in investments’ and, unsurprisingly, requires a general understanding of the UK position given the main statutory prohibition is almost identically worded in both the Financial Services and Markets Act and the Regulated Activities Order of the UK and the Gibraltar Financial Services Act 2019. It is possible that, given the Gibraltar Access Regime, the concepts become more aligned with time, and certainly there seems no good reason that an activity which is legal in the UK should not be legal in Gibraltar.
The General Prohibition and Arranging Deals in Investments
Section 8 of the Financial Services Act 2019 (“FSA”) provides that:
8.(1) No person may carry on a regulated activity in or from Gibraltar, or purport to do so, unless the person is–
(a) an authorised person; or
(b) an exempt person.
(2) The prohibition in subsection (1) is referred to in this Act as the ‘General Prohibition’.
This wording is basically identical to the Financial Services and Markets Act 2000 (“FSMA”) of the UK, at section 19, with the addition of the word “from Gibraltar” in place of “in the United Kingdom”. Presumably, given the relatively small size of Gibraltar, the regulator is cautious about firms establishing a presence in Gibraltar solely to offer regulated services exclusively outside of Gibraltar borders. Any debate surrounding the territorial effect of the General Prohibition under the FSA is a complex issue and best reserved of a more detailed examination at another time: however, as a general principle, activities conducted from within Gibraltar – such as sending emails to clients whilst physically located in Gibraltar – are likely to fall within the scope of the FSA.
The FSA goes on to list what constitutes ‘regulated activities’ in Schedule 2.
In the UK, such regulated activities are defined in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. That is a mouthful, so everyone refers to it as the Regulated Activities Order (we will go further and refer to it simply as the “RAO”). The fact that it is an Order, and not an Act, allows for swifter amendment, and it is amended regularly (1192 times since 2002 apparently, but many of those change were not amendments to what constitutes of regulated activities).
The primary regulated activities of interest, particularly in the context of introducing capital or investors to potential investees (most typically, for a potential share subscription, but loan capital and other forms of finance are in point) are:
- the one that appears at paragraph 54A(1) FSA Schedule 2, being “arranging deals in investments”; and
- somewhat less likely, providing “investment advice”, appearing at paragraph 52 FSA Schedule 2.
This article does not examine other regulated activities in the context of introducing, since there is quite a leap from making introductions to, for example, portfolio management. With respect to the regulated activity of giving ‘investment advice’, it is probably trite to say, if you don’t want to be caught by this heading, don’t “advise” and always give a disclaimer when making an introduction.
Territoriality of UK Legislation
As the reader will gather from the above, UK authorisation requirements are only triggered if regulated activities are carried on in the UK. For many introducers based in Gibraltar, the UK legislation will not be relevant beyond explaining the meaning of the Gibraltar rules.
When an introducer from outside the UK engages with clients or counterparties located within the UK, their activities may fall under UK jurisdiction. The introducer should carefully assess whether their activities trigger any local authorisation obligations in the UK. Additionally, they must ensure compliance with the UK's financial promotion regulations, which are detailed below. In most cases, interactions with UK-based clients or counterparties are likely to qualify as financial promotions.
The UK regulatory framework offers certain exclusions that permit overseas introducers to engage with UK persons without violating local regulations. This can occur if the activities are regarded as taking place outside the UK or if a specific exemption applies, protecting those activities from UK legal requirements.
Arranging deals in investments
The FSA provides as follows:
54A.(1) Making arrangements with a view to a person who participates in them buying, selling, subscribing for or underwriting a financial instrument, structured deposit or contract of insurance is a specified kind of activity.
Contrast this with the UK equivalent in the RAO:
25.—(1) Making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment which is—
(a)a security,
(b)a relevant investment,
(c)an investment of the kind specified by article 86, or article 89 so far as relevant to that article, or
(d)a structured deposit,
is a specified kind of activity.
(2) Making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments falling within paragraph (1)(a), (b) (c) or (d) (whether as principal or agent) is also a specified kind of activity.
As you can see, Article 25(2) of the RAO widens the prohibition in Article 25(1) somewhat. The Gibraltar FSA does not seem to place significant emphasis on Article 25(1) (referred to in the FCA Handbooks as ‘arranging (bringing about) deals in investments’), but it is important to recognise that the two sub paragraphs are NOT identical. The former requires a deal to be ‘brought about’ – the latter capture far broader activities and just needs ‘arrangements’ to be made which are intended to bring a deal about.
Both the RAO and FSA continue by including specific exemptions, where they diverge further:
FSA in Gibraltar provides:
(4) Subject to sub-paragraph (3), there are excluded from sub-paragraph (1)–
(a) the operation of a multilateral trading facility or an organised trading facility;
(b) arrangements which a person makes with a view to entering into transactions as principal or as agent for some other person;
(c) arrangements made by a person (“P”) who is not an authorised person with a view to another person (“the client”) entering into a transaction with or through an authorised person based on advice given to the client by the authorised person where–
(i) the client is not seeking and has not sought advice from P as to the merits of the transaction (or, if the client has done so, P has declined to give it but recommended that the client seek the advice from an authorised person); and
(ii) P does not receive from any person other than the client any pecuniary reward or other advantage for which P does not account to the client;
(d) arrangements under which a person is to accept, as principal or agent, a debenture or similar instrument acknowledging indebtedness in respect of a loan or guarantee provided by that person or the person’s principal;
(e) arrangements solely for the provision of finance to enable a person to buy, sell, subscribe for or underwrite financial instruments, structured deposits or contracts of insurance;
(f) arrangements under which a person (“the client”) is to be introduced to an authorised person with a view to the authorised person giving independent advice to the client; or
(g) arrangements made by a person for the purposes of issuing its own shares, share warrants, debentures or debenture warrants.
The RAO by contrast includes 18 articles of exclusions, which to some extent are mirrored by the FSA exclusions. We don’t repeat those here save in so far as they are relevant.
THE LEADING UK CASE (WATERSHEDS LTD V (1) DAVID DA COSTA (2) PAUL GENTLEMAN [2009] ALL ER (D) 140 AND THE PERG GUIDANCE
In addition to Perimeter Guidance in the FCA handbooks (bear in mind these are persuasive but do not bind the UK courts), UK practitioners have the benefit of various case law touching on this aspect of law.
Background of the Case
In the Watersheds case, Real Creative Group Limited (RCG) hired Watersheds Limited to help secure £1 million in funding and manage discussions with potential investors. Despite Watersheds' efforts, they failed to secure the required financing, and RCG eventually went into administration due to financial pressures. Watersheds then attempted to recover fees based on their contract. However, RCG counterclaimed, asserting that Watersheds had acted without proper authorisation, engaging in regulated activities. According to Section 26 of FSMA, if a person carries on a regulated activity without being authorised, any agreement made in the course of that activity is unenforceable against the other party.
The court’s focus was on whether Watersheds’ actions did in fact fall within regulated activity under Articles 25(1) and 25(2) of the RAO, specifically whether they were ‘arranging deals in investments’. While it was agreed that the activity involved the potential sale of shares (a regulated product), the judge ruled that Watersheds’ activities did not have the direct effect of concluding a transaction and therefore did not meet the criteria of Article 25(1). The judge also determined that Watersheds' actions did not constitute "arranging" under Article 25(2), guided by FSA Perimeter Guidance, which highlighted that such activities must involve providing facilities akin to exchanges or clearing houses
Post-Watersheds: Updated Guidance from the FCA
In response to the Watersheds ruling, the FCA updated its guidance at PERG 2.7.7B clarifying its position on Article 25(2). The revised PERG (Perimeter Guidance) emphasised that some introductions can fall within the scope of regulated activities if they go beyond mere introductions.
PERG 2.7.7 says (pay attention to the words in bold emphasis):
The activity of arranging (bringing about) deals in investments (Article 25(1) is aimed at arrangements that would have the direct effect that a particular transaction is concluded (that is, arrangements that bring it about). The activity of making arrangements with a view to transactions in investments (Article 25(2) is concerned with arrangements of an ongoing nature whose purpose is to facilitate the entering into of transactions by other parties. This activity has a potentially broad scope and typically applies in one of two scenarios. These are where a person provides arrangements of some kind:
- to enable or assist investors to deal with or through a particular firm (such as the arrangements made by introducers); or
- to facilitate the entering into of transactions directly by the parties (such as multilateral trading facilities of any kind……..
The scope of article 25(2) of the Regulated Activities Order (the subject of PERG 2.7.7B G) was considered by the High Court in the case of Watersheds Limited v. David Da Costa and Paul Gentlemen. The judgement suggests that the activity of introducing does not itself constitute a regulated activity for the purposes of article 25(2) of the Regulated Activities Order. The FCA has considered whether the judgement necessitates any change to the views expressed in PERG 2.7.7B G and elsewhere in PERG. It appears to the FCA that the judgement should be considered in the light of the case to which it relates.
……..the FCA remains of the view that article 25(2) of the Regulated Activities Order includes certain types of arrangements for making introductions whilst recognising that the judgement in the Watersheds case introduces an element of doubt….
In the FCA's view, a mere passive display of literature advertising investments would not amount to the article 25(2) activity:
By saying “certain types” of arrangements the FCA is acknowledging that not all introducers will make such arrangements caught by Article 25(2). Clearly there is a balance being struck: the FCA do not want a corporate finance firm claiming that it does not conduct the regulated activity of “arranging” when helping to find investors in relation to a typical fund raising, but an introducer will not always be “arranging” by putting a potential investor in touch with a company seeking investment. In order for this to be a regulated arrangement, the introducer would have to do more than effect a mere introduction and would need to provide some facilities for the completion of transactions. The exact limits of these have not been tested because every case has been decided upon its facts.
The FCA expand further in the context of advertisements by publishers or website operators:
The Regulated Activities Order contains an exclusion (article 27: Enabling parties to communicate) to bring a degree of certainty to this area. This applies to arrangements which might otherwise fall within article 25(2) merely because they provide the means by which one party to a transaction (or potential transaction) is able to communicate with other parties. In the FCA's view, the crucial element of the exclusion is the inclusion of the word ‘merely’. So that, where a publisher, broadcaster or Internet website operator goes beyond what is necessary for him to provide his service of publishing, broadcasting or otherwise facilitating the issue of promotions, he may well bring himself within the scope of article 25(2).
Gibraltar does not have the legislative equivalent of Article 27 of the RAO. That said, where the means of communication (e.g. a website) is provided to UK persons, the relevant location for regulatory purposes is probably the UK if the server is located there.
Article 33 of the RAO provides an express exemption in the context of introducing where the introduction is to an authorised person in order to obtain independent advice, similar to paragraph 54(4)(d) of the Schedule 2 of the FSA in Gibraltar. It is important to remember that this exclusion is only needed where the introducing activity would otherwise qualify as arranging in Article 25(2) in the first place. It does not mean that all other introducing activities would be caught by Article 25(2).
With the regulatory background set out above, a few examples may assist the reader in envisaging how the legislation might apply to the activities involved in introducing investors to investee companies:
Example One:
An individual in Gibraltar enters into an introducer agreement with a private limited company in the UK which is seeking to raise capital via an issue of shares. He will be paid a percentage of the amount he successfully introduces to the company. If the introducer simply introduces a friend or acquaintance to the company, and does nothing else, he will not fall foul of Article 25 RAO or paragraph 54A Chapter 2 FSA.
Example Two:
A private investment member’s club which has only high net worth investors or sophisticated investors is run by some of the members. They filter out potential investments if they do not look promising, but do not negotiate specific investments on behalf of members.
This could fall within Article 25(2) RAO (and para 54A in Gibraltar) unless the club management refrains from:
- helping members negotiate the terms of the investment;
- acting as the spokesperson for the investee companies e.g. answering members in relation to any questions they have about the investment;
- filling in any subscription forms;
- accepting or transmitting any investor monies;
- serving as a central collective voice or agent for the members who actually invest, beyond providing a website through which the investee shares news, for example;
i.e. the arrangements for the investment are not made with or through the club as described in PERG 2.7.7B – the investor has to deal directly with the investee.
Further, and as a separate matter, any introducer must be always alert not to recommend an investment as a ‘good investment’ (because of the separate regulated activity of advising on investments) – it must be clear that the introducee has to do his or her own due diligence on the respective investment and come to their own conclusions on the merits of an investment. Ample disclaimers are advisable. And in the case of the UK, investments in products such as shares in private companies should not even be presented in such a manner or to persons to whom such investments cannot legally be offered under the UK financial promotions rules. This provides a convenient segue into the Financial Promotion rules in the UK and the more limited equivalent rules in Gibraltar.
FINANCIAL PROMOTIONS
UK
Section 21 of the Financial Services and Markets Act 2000 (FSMA) provides a restriction for unauthorised persons with respect to making financial promotions. Understanding the law on financial promotions is important for introducers when approaching potential investors. Essentially, individuals or entities are prohibited from communicating an invitation or inducement to engage in investment or claims management activities unless one of the following conditions is met:
- The person making the communication has the relevant authorisations under FSMA.
- An authorised person, compliant with FCA regulations, has approved the communication.
- The communication qualifies for an exemption under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”), which contains specific exemptions.
FCA's Definition of Communicating a Financial Promotion
The FCA's PERG 8.6 guidance outlines that for a person to be considered as communicating a financial promotion, they must actively engage in making the communication. This can be as simple as transmitting materials or distributing content knowingly intended for others to act upon. The guidance also clarifies that ‘communication’ includes actions that lead to another person making the communication, and this definition aligns with the equivalent law in Gibraltar.
Scope of Investment Activity
The restriction on financial promotions extends to various activities, as defined in Section 21(8) of FSMA:
- Entering or offering to enter into an agreement that involves a "controlled activity," which only authorised individuals may perform under FSMA’s Part 4A permissions.
- Exercising rights related to a "controlled investment," including buying, selling, underwriting, or converting such investments.
Controlled activities and investments are outlined in Schedule 1 of the FPO and include a broader range of activities and assets compared to the RAO. This means that even individuals not typically requiring FSMA authorisation might still fall under the restriction if their communications relate to controlled investments or activities.
Real-Time vs. Non-Real-Time Communications
The FPO distinguishes between real-time and non-real-time communications:
- Real-time communication: Defined in Article 7(1) of the FPO, this refers to any interaction that occurs during a personal visit, telephone conversation, or similar interactive exchanges. Because real-time promotions can create more immediate pressure, they are subject to stricter regulations.
- Non-real-time communication: These include letters, emails, or publications such as magazines and websites. The FPO allows for more flexibility with non-real-time communications as they generally involve less pressure.
-
Protection and Exemptions for Financial Promotions
The FPO offers more protection against real-time communications due to their high-pressure nature. However, solicited real-time communications, such as those initiated by the recipient, may benefit from exemptions, similar to non-real-time communications (for example, one-off promotions under Article 28A of the FPO). Unsolicited real-time promotions, especially those targeting individuals, have fewer exemptions due to the increased risk to consumers. Even authorized persons are generally prohibited from engaging in unsolicited real-time communications, unless exemptions apply.
FPO Exemptions
There are over 70 exemptions contained in the FPO. The ones most probably relevant to unauthorised introducers based in Gibraltar introducing persons based in the UK include:
- Overseas recipients (article 12).
- Investment professionals (article 19).
- Overseas communicators (Articles 30 to 33)
- Persons in the business of placing promotional material (article 38).
- Persons in the business of disseminating information (article 47).
- High net worth individuals (article 48).
- High net worth companies, unincorporated associations etc. (article 49).
- Sophisticated investors (article 50).
- Self-certified sophisticated investors (article 50A)
- Associations of high net worth or sophisticated investors (article 51).
Each exemption would have to be considered on its merits, and it is perfectly possible that more than one exemption applies to a communication.
If an introducer is relying on the FPO exemptions in Articles 48, 49, 50, 50A and 51, they should take great care to either get the relevant certifications (in the format provided by Schedule 5 of the FPO) or undertake due diligence on the entity prior to making any introductions. In the case of an investment club for HNWIs or sophisticated investors, documentation on a potential investment (where there is any element of inducement, as opposed to historic case studies) should always be locked behind a membership login process.
Gibraltar
Of course, for a Gibraltar based introducer, they must also consider not just the UK legislation, but the Gibraltar legislation in addition.
Section 12 of the FSA in Gibraltar provides a similarly worded restriction to the UK with one key difference:
12.(1) A person (“P”) must not, in the course of business, communicate an invitation or inducement to enter or offer to enter into an agreement the making or performance of which by either party constitutes the carrying on of a regulated activity.
The use of the word “regulated activity” takes the place of “investment activity” in the UK equivalent. Therefore, many of the points raised above are simply not relevant within Gibraltar, but of course they are if you are ‘promoting’ to persons in the UK.
For example, if a company offers its shares on a private basis to an individual, that is not a regulated activity. Therefore, it would seem logical that introductions not caught by paragraph 54A (following the discussion above) are entirely outside the Gibraltar financial promotion rules: the person investing is not conducting a regulated activity, and neither is the investor nor the investee company which is issuing shares or bonds. Any other interpretation would make it impossible for an unauthorised introducer to operate from Gibraltar – the FPO exemptions are simply not replicated in Gibraltar law. Whether this will change as a result of the Gibraltar Access Regime and closer integration of the financial services regime, is to be seen.
The Gibraltar FSA applies the general restriction “in particular” to any “unsolicited communication made in the course of a personal visit, telephone conversation or other interactive dialogue with a recipient (whether in Gibraltar or elsewhere). A communication is “unsolicited” if the personal visit, conversation or other interactive dialogue was not initiated at the request of the recipient or takes place otherwise than in response to an express request from the recipient. This concept is nearly identical to “real time” communications in UK law. Non-real time communications are not even mentioned.
From a Gibraltar perspective then, this would at first blush suggest that an informal chat between acquaintances about an investment opportunity would be fine, if the parties were already discussing such matters, in regular communication and the potential investor was asking about opportunities. In our second example, a private investment club where members are actively seeking investment opportunities, presumably does not fall foul of paragraph 12(1) or (2) either.
The Financial Services (Restricted Promotions) Regulations 2023 (“RPR”)
Finally, it is worth mentioning that, although not technically relevant to non-authorised persons who are making introductions, the frequently used certified HNWI, Certified sophisticated investor and Self Certified sophisticated investor concepts do exist in Gibraltar law (albeit with slightly different meanings to the UK). The RPR introduced last year provides that
A regulated 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.
A “speculative illiquid security” is a debenture or preference share which has a denomination or minimum investment of less than £100,000 (or an equivalent amount) and is to finance loans, specified investments, buy real property or fund the construction of real property.
Any of the special categories of investors mentioned above can be made, subject to a review of the client’s profile and objectives.
As mentioned above this would not however, seem to catch an unauthorised person that was simply making an introduction not caught by paragraph 54A (because there is no regulated activity, therefore how can it be a “financial promotion”).
CONCLUSION
Persons who have an opportunity to make introductions of capital, in return for fees or free equity, should appreciate that they have to carefully navigate the legal requirements governing this activity, whether domestically within Gibraltar or internationally into the UK. The safest course of action is always to make the introduction and then walk away, but that is not always possible. There is a wealth of guidance on the topic within the FCA handbook (PERG) which should help to keep you on safe ground within Gibraltar too. However, legislative differences remain, and you will need coordinated advice in the UK and Gibraltar, preferably from advisers who can advise on both regimes.
