UK: The Raising of Corporate Finance

Last Updated: 10 March 1999
Corporate finance is a difficult activity to characterise under the Financial Services Act 1986. Indeed, "corporate finance" itself means different things to different people. Some corporate finance activities clearly fall within the scope of the Act. Others may do so or may not; there is a degree of uncertainty in this area. The Financial Services Authority's Guidance Release 3/98, entitled The Raising of Corporate Finance under the Financial Services Act 1986, is intended to throw some light on this complex area.

The Guidance Release sets out to identify the boundaries of regulation under the Act, and thereby to be of assistance to businesses involved in financing activities which do not need to be regulated. The following points will be of particular relevance:

  • Persons involved in some fashion with the raising by companies of equity or debt capital may need to be regulated (for example, bank financing, venture capital, private placings, public offers, offers to existing shareholders and raising money on an exchange).
  • Of the various heads of "investment business" in the Act, a corporate finance provider is most likely to be at risk of "arranging deals" or "advising on investments" (potentially also of "dealing in investments"). That provider might prepare an offer document, negotiate an introduction to a source of finance or arrange for a deal to be entered into in a number of ways.
  • The Guidance Release confirms that a company does not deal or arrange deals in the course of issuing its own shares or debentures.
  • Arrangements fall within the Act only if they bring about or would bring about the transaction in question (for example, assisting investors to complete an application form or negotiating the terms of a placing).
  • The "arranging deals" concept excludes providing finance for a person to buy investments; arranging finance with a bank as a consequence of which the bank acquires a debenture; and introducing a person to an authorised investment firm that will advise him on a discretionary basis.
  • A body corporate involved in activities that encourage commercial enterprise in the UK or any part of it and which does not seek to make a profit from the arrangements it makes (but merely to cover its costs) is exempt insofar as its activities constitute arranging. This has particular relevance for "business angel" services.
  • To fall within the Act, advice has to be given to investors or potential investors, and has to be on the merits of buying or selling investments or exercising investment rights. Much advice by a corporate finance firm to its corporate client will typically fall outside the Act.
  • There is a useful exclusion from the Act for arrangements and advice in respect of the sale of more than 75% of the voting share capital in a body corporate. This can be helpful where a small company is sold by one family group to another.
  • Some guidance is also provided on certain exemptions from the general rule that an unauthorised person may not issue an investment advertisement without its content having been approved by an authorised person.

It should be clarified that this document provides generic guidance only. Businesses affected by it should certainly read it, but should not assume this is a substitute for fuller advice on specific circumstances which affect them. The Financial Services Authority is at pains to remind the reader that the Guidance Release does not have the force of law.

For further information please contact David Tunkel, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: +44 171 655 1000

This article was first published in the Spring 1999 Hammond Suddards Corporate Finance Newsletter Update

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

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