2024 Financial Promotion Reforms: Impact on Startups & How to Adapt

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For startups gearing up for a funding round, staying ahead of regulatory changes is as crucial as perfecting your pitch deck. The recent amendments to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO), effective from January 31st 2024, are set to change the game, particularly for those targeting High Net Worth Individuals (HNWI) and self-certified sophisticated investors.

These investor groups have been pivotal in the UK startup ecosystem, not only as capital sources but also for their industry knowledge, networking, and mentorship. They often make decisions faster and with fewer hurdles than traditional investors, making them ideal for early-stage companies needing seed or growth funding.

In this blog, we’ll delve into what these reforms mean for startups, highlighting the new criteria and what founders need to know to navigate these changes successfully.

As with all our articles, please don’t take this as personal tax, financial or other advice (you need to speak to us for that).

What’s Changing

High Net Worth Individuals

For HNWIs, the financial thresholds have been significantly increased:

  • To qualify, an individual now needs a minimum annual income of £170,000, up from the previous requirements of £100,000.
  • Secondly, the net asset test is seeing a substantial increase, moving from £250,000 to £430,000. This must now exclude the value of an investor’s primary residence, benefits held in pension schemes, and rights under insurance contracts, and liabilities such as mortgages or development costs must be deducted.
  • Steady and consistent income will be emphasised, meaning that occasional financial windfalls won’t count towards HNW status.
  • Finally, those eligible will now be referred to as High Net Worth Investors, dropping the word “certified” from their original title. 

Self-Certified Sophisticated Investors

For self-certified sophisticated investors, the criteria has also been refined:

  • The previous route to self-certification, which allowed individuals to qualify by having more than one investment in an unlisted company in the previous two years, has been removed. This reflects the ease with which ordinary retail investors can now invest in unlisted companies.
  • Furthermore, the eligibility relating to company directors has been amended. Now, an individual must have been a director of a company with an annual turnover of at least £1.6 million in the last two years, increased from the previous threshold of £1 million.

What the Reforms Mean For Your Startup

Under the 2024 financial promotion reforms, the responsibility of firms to ensure individuals meet the high net worth or sophisticated investor criteria remains unchanged. The ‘reasonable belief’ test remains in place, but there are important updates. Firms must now provide more detailed disclosures in their communications to investors, with investor statements that are engaging and easy to understand. These changes include clarifications on qualifying conditions, a focus on the absence of FCA rules and protections in financial promotions under these exemptions, and a requirement for prospective investors to specify which criteria they meet.

Adapting to Change

Ultimately, the updated criteria for High Net Worth individuals and Self-Certified Sophisticated Investors are set to reshape not just who’s investing, but how they’re doing it. Let’s unpack how you can smartly navigate these changes:

Diversify Your Investor Base

With a smaller pool of HNWI and sophisticated investors meeting the higher criteria, startups can seek alternative sources of funding. Consider reaching out to angel investor networks, crowdfunding platforms, and government grants or subsidies. Diversifying your investor base not only mitigates the risk of dependency on a few wealthy individuals but also brings a variety of perspectives and resources to the table.

Leverage a Tech-Forward Approach

Whether it’s in product development or customer acquisition, a tech-forward approach can be a big draw for investors. It’s crucial to maintain a lean operation, especially when securing early-stage funding might take longer than expected. By getting your tech stack right, you can reduce overhead and boost productivity. Consider both established tools like Hubspot, Xero, and Github, as well as smaller, cost-effective options like Motion, Fireflies AI, or Notion. This strategy positions your startup for success without the risk of inflating operational expenses unnecessarily.

Harness the Power of Data

Use data analytics to make informed decisions and to demonstrate market potential and customer behaviours to investors – ensuring you know the Key Performance Indicators (KPIs) and data points vital in your industry. Demonstrate metrics like Customer Acquisition Cost (CAC) and churn rate, comparing them to industry averages or competitors’ benchmarks. Not sure where to start? Check out our UK Startup Metrics Guide for a deeper dive into measuring what matters!

The Bottom Line

The key takeaway? Flexibility and adaptability will be your best allies. Whether it’s diversifying your funding sources, preparing for more rigorous investor evaluations, or leveraging technology and data analytics, the goal is to stay one step ahead.

Navigating these changes doesn’t have to be a solo journey. If you’re looking for tailored advice that’s specific to your startup’s needs, why not book a chat with Elliott Gaspar, our Founding UK Director? 

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