Startup funding strategies for 2023
With data, experience and insights gained from £1.3B+ raised on SeedLegals, we’ve curated these top three funding strate...
Here at SeedLegals, we get asked a lot of questions about who is able to invest in your business. “Can anyone invest?” “Is it that only professionals are allowed to invest?” “What paperwork does my prospective investor need to fill out to be eligible to invest?” “What about the FCA restrictions?” The list goes on…
This article will demystify the circumstances surrounding investment, and give you practical advice that you can take away and explain to your prospective investors. I’ll begin by outlining the different categories of investors, and will end explaining what those different categories of investors need to do, so that they can invest in your business! You can create the exact statements each of your prospective investors need to sign on SeedLegals in just a few minutes. Get started here.
The good news, is that anyone can invest in your business. Be it your friends, family members, professional investors, even your postman if you can convince him!
The caveat, is that the government recognises this kind of investment is risky. So, in October 2014, the Financial Conduct Authority (FCA) introduced a restriction on marketing ‘non-readily realisable’ securities. Shares in a startup fall within this category of security as currently, there is no secondary market to trade or sell your shares once you have them.
What this means is, as an investor, you have to wait for the company to either be bought by a larger company, or listed on a regulated market before you can realise any profit. This takes time, and if you have invested all of your life savings off the back of a conversation with a persuasive suit in a bar, there lies an immediate cash flow problem, and a very real risk that you could lose it all if the company goes under, which, as sad as it is to admit, happens to most startups!
To counteract this, the response from the FCA was confine the promotion of such investments to those individuals who they are confident can understand the risks, or if less confident about the individual, limit the proportion of their assets that they can invest.
The different categories of investor are in the next section, and in the final section, the article will explain the correct way to verify your status as an investor by signing the relevant statements (all of which can be found on the SeedLegals platform!).
This is the category the postman, and your friends and family will typically fall in. To become an everyday investor, you need to agree not to make more than 10% of your investments – including savings, stocks, ISAs, bonds, and any other property that is not your primary residence – into non-readily realisable securities e.g. startup shares. The FCA refers to this category as ‘Restricted Investors’.
An ‘Advised Investor’ is someone who has an FCA regulated advisor giving them advice about each investment they make. If you receive FCA regulated advice the restriction on the amount you can invest no longer applies.
This can be achieved in two ways, either certification from a qualifying firm confirming the investor in question has been assessed by that firm as being sufficiently knowledgeable to understand the risks associate with engaging in investment activity in non-readily realisable securities and who has signed the underneath corresponding statement. Or, through self-certification which requires signing the underneath corresponding statement.
This group is for that rich uncle. To be eligible to be classed as a high net worth investor you either have to show, through the financial year preceding the date of investment an annual income of £100,000 or more (not including money drawn from pension savings). Or, over the same period of time can show net assets to the value of £250,000 or more. Net assets for this purpose does not include: (i) property which is the investors’ primary residence or money raised through a loan on that property, (ii) any rights under a contract of insurance (iii) any benefits payable on termination of service, on death or retirement, (iv) any withdrawals from pension savings.
Once your personal investors are all confident as to the category of investor they fall within, you will need each of them to sign a corresponding statement – to prove that is the case, and that they understand the risks involved in this type of investment – ideally before they sign the term sheet.
The statement also acts to waive any rights your investors would have had under the Financial Conduct Authority, Financial Ombudsman Scheme, or Financial Services Compensation Scheme in relation to the restriction on financial promotions.
Below is a summary of what each category of statement should include:
I make this statement so that I can receive promotional communications relating to unlisted shares and unlisted debt securities as a restricted investor. I declare that I qualify as a restricted investor because:
(a) in the twelve months preceding, I have not invested more than 10% of my net assets in unlisted shares or unlisted debt securities; and
(b) I undertake that in the twelve months following I will not invest more than 10% of my net assets in unlisted shares or unlisted debt securities.
I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on unlisted shares and unlisted debt securities.
I am a client of a firm that has assessed me as suitable to receive financial promotions. I accept that the investments to which the promotions relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on unlisted shares and unlisted debt securities.
I declare that I am a self-certified sophisticated investor for the purposes of the restriction on promotion of non-mainstream pooled investments. I understand that this means:
(i) I can receive promotional communications made by a person who is authorised by the Financial Conduct Authority which relate to investment activity in non-mainstream pooled investments;
(ii) The investments to which the promotions will relate may expose me to a significant risk of losing all of the property invested.
I am a self-certified sophisticated investor because at least one of the following applies:
(a) I am a member of a network or syndicate of business angels and have been so for at least the last six months prior;
(b) I have made more than one investment in an unlisted company, including via Crowdcube, in the two years prior;
(c) I am working, or have worked in the two years prior, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises;
(d) I am currently, or have been in the two years prior, a director of a company with an annual turnover of at least £1 million.
I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me seek advice from someone who specialises in advising on non-mainstream pooled investments.
I make this statement so that I can receive promotional communications which are exempt from the restriction on promotion of non-mainstream pooled investments. The exemption relates to certified high net worth investors and I declare that I qualify as such because at least one of the following applies to me:
(i) I had, throughout the financial year immediately preceding, an annual income to the value of £100,000 or more;
(ii) I held, throughout the financial year immediately preceding, net assets to the value of £250,000 or more.
To create investor statements for potential investors, sign up to SeedLegals and create unlimited statements on the free trial. It takes 5 minutes to set up, and also gives you access a full suite agreements you need to get investment-ready.
Want to know more? Just hit the chat bubble in the bottom right corner or book a call with a member of the SeedLegals team.