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New treatment for venture capital investments?

Updated: Jun 7, 2021

The recent discussion paper from the FCA on High-Risk Investments, covered in our earlier post, sets the scene for it to be no longer possible for ordinary retail investors to access venture capital investments, such as those available through crowdfunding or EIS Funds, whether or not those investors are being advised.

All investments classed as high-risk investments are to be subject to additional steps that ensure the investor is categorised correctly and is prompted to consider whether a High-Risk Investment is right for them.

However, venture capital may also be re-classified, within the broad bucket of High-Risk Investments, as a speculative illiquid security.

Speculative Illiquid Security is the regulatory term for products caught up in the mini-bond ban. These are debt instruments and preference shares where the funds are being used for a speculative activity like property development or lending. Investments that fall into this category are already subject to a mass marketing ban and tight controls that mean ordinary investors can't easily find them and then additional obstacles are put in their way to prevent investment. This would apply to venture capital if the proposals go ahead.

High Risk Investments are separated into Non-Readily Relisable Securities, Speculative Illiquid Securities and Non-Mainstream Pooled Investments
How High-Risk Investments are grouped

To see how venture capital could be caught up in these extra restrictions, you need to spot two changes within the paper.

Firstly, the FCA wants to expand the definition of Speculative Illiquid Securities to include ordinary shares as one of the investment types that is caught up in the definition, where the funds raised are being used for something speculative in nature.

Secondly, there is a proposal to expand the list of features that can make the use of funds 'speculative'. The only example provided in the paper is investments in "businesses which have no track record". The paper states that retail investors "may not be best placed to assess the risks of the business establishing itself in the early days."

If both proposals were to go ahead, the ability of ordinary retail investors to support any early-stage business would be entirely removed. Whereas should the current categorisation, as non-readily realisable securities, continue retail investors can at least find and assess investments and then if they prove they understand the risks, or if a regulated financial adviser assesses the investment as suitable for their needs, they can proceed to invest.

If this topic is of interest to you, you may be interested in our round table for the venture capital industry taking place on 10 June 2021. Email if you would like to attend.


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