How can property developers attract suitable investors … without getting in trouble with the Financial Conduct Authority?
We are often asked to help with this. So we thought we would share some of our experiences … maybe it will help you cut through some of the confusion and possibly provide a solution to your funding requirements.
29 April 2015
A key challenge for property developers is raising finance. Although at this particular point in time it appears relatively easy to raise senior debt from commercial lenders, there’s still a funding gap and, with a market of investors actively interested in property development, there is an alternative.
One approach is to partner up with one or two individuals with deep pockets. In many ways, this is ideal because, if all goes well, the trust you build up together can enable you to react very quickly to opportunities. However, your investor(s) will naturally want some degree of control over what projects you pursue and how you deal with them. And what if you just don’t know any suitable investors who might want to pursue your investment opportunity?
If you’re reading this, you probably have an immediate priority, which is to fund whatever project you’re looking at. There are any number of ways of doing this, such as creating and marketing your own fund structure, working with an existing crowd-funding platform, or engaging intermediaries to fund-raise on your behalf. This article addresses only one possible approach, namely attracting investment from individual, high net worth investors or sophisticated investors in the UK.
The regulatory risks if you get it wrong
As you will no doubt be aware, there are a number of regulated activities which can only be carried out by someone who is authorised by the Financial Conduct Authority (FCA), and who has the appropriate permissions. These include (in broad terms):
issuing financial promotions
advising on investments
establishing or operating a collective investment scheme.
Contravening these regulations generally involves committing a criminal offence. And from a common sense perspective, you just don’t want the stress of getting on the wrong side of an organisation like the FCA. This means that you need to be careful if you are thinking about establishing a vehicle or structure to facilitate investment – such as SPVs or trusts, LLPs or partnerships.
It is worth highlighting that although you may have seen other organisations operating in a particular way this doesn’t mean that they have got it right and that they are adhering to the regulations applicable to them. The FCA regularly prosecutes non-complying businesses and individuals, and they might just not have got round to that one yet.
Exemptions and safe harbours available to you
The good news is that there are various exemptions and safe harbours which you can legitimately work within to achieve the investment you are looking to source. For example:
Promoting a direct investment in property is not a regulated activity as such.
Certain categories of investors can be promoted to without the need for an FCA authorised person to be involved, provided that certain rules are complied with. These categories include self certified “high net worth individuals” and certified and self certified “sophisticated investors”.
Requesting or collecting information about individuals, so that they can be categorised as being exempt from the financial promotions regime, is not an activity which is regulated by the FCA.
Providing information is generally not an FCA regulated activity, as long as it doesn’t amount to “advice” and it does not constitute an invitation or inducement to engage in investment activity.
As with all FCA matters, it’s important to be aware of the regulations applicable to you and ensure that you are in compliance. But the key message here is that practical, affordable and workable solutions are available.
So what does this mean for you?
A possible approach
In general, there is little point in getting detailed legal and tax advice on a particular structure or project until you are reasonably confident that there will be sufficient investor appetite to fund your project, and that you know what the profile and needs of your investors are likely to be. In other words, the primary challenge is usually how to market the investment without undertaking any regulated activity without authorisation or permission.
To address your immediate goal of funding a current project, you may want to follow an approach which looks something like this:
Define your funding needs for this project and for potential similar projects over the next 12 to 24 months. What would an ideal investor base look like, in terms of the profile of investor, amount to be invested in each project and total number of investors?
Analyse your existing base of contacts and relationships and your ability to reach people who may match your ideal profile.
Create a strategy to reach out to suitable contacts. This may be as simple as picking up the phone, or it may involve some form of PR activity. You will need legal advice at this point, so that you are clear about what you can and can’t do, and what information you will need to gather about prospective investors in order to be able to present specific opportunities to them.
Once you have a list of people you can promote specific opportunities to, you will probably want to have some kind of investor pack you can give them. This will include a summary of the opportunity (with appropriate legal disclaimers) and an application form. It may also include the relevant legal documents which constitute the structure – for example, a draft shareholders agreement and articles of association if the investors will become shareholders in an SPV company. Again, you will need legal guidance as to exactly how these documents can be communicated to prospective investors so that you don’t fall foul of the relevant rules.
Your long-term strategic goals
Once you have met your immediate funding need, you may want to take a more strategic, long-term view. Where you want to be in, say, 5 years’ time? Presumably, in a significantly better position than you are now.
You had an acknowledged reputation as experts and specialists in your chosen field – not just in relation to managing property developments, but also meeting investors’ needs?
You had a loyal base of followers, who had an affinity with your approach?
A significant part of that follower base included prospective investors with whom you had a personal relationship, and who were keen to share in the benefits of supporting your projects?
It’s not hard to see that, if you achieved that position, the time and cost it would take to fund projects would be significantly lower. The point we’re making here is that these strategic goals can be achieved without carrying on regulated activities, and without creating a formal legal fund structure. Just food for thought …