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FCA announced proposals to ban the marketing of speculative illiquid securities, including mini-bonds

September 17, 2020

Mini-bonds are a form of debt that allows investors to invest in a company and receive a fixed return over a set period of time, with the initial investment returned at the end of the prescribed duration. Mini-bonds allow investors to lend money directly to businesses, usually with a higher rate of return due to the increased risks involved when compared to more traditional investments and bonds.

The securities on offer are usually issued by smaller firms and start-up companies, which could otherwise find it difficult to raise money from banks or other more traditional sources – so carry much higher risks. These companies could be more likely to face cash flow issues that result in delays to interest payments, or the company may go under and be unable to pay any money back to investors.

Furthermore, mini-bonds are highly illiquid, which means they cannot easily be converted into cash. They often have no secondary market and therefore they cannot be sold on if the investor needs the money before maturity. Typically, these types of mini-bonds are not listed.

The FCA’s intervention

Recently, the FCA has made a number of moves towards restricting the ability of retail investors to invest in speculative mini-bonds. In January 2020, the FCA imposed a temporary ban on the promotion of mini-bonds to retail investors, unless the firm knows that the investor being promoted to is either a sophisticated or a high net worth investor. The FCA has since announced under CP20/8 that it is looking to make the ban permanent and is consulting about its proposals.

The FCA has started to contact firms that it has identified as being in the mini-bond markets, including issuers, marketers, custodians, executing brokers and principals of Appointed Representatives that market and/or issue mini-bonds. Firms are being asked to comment on the consultation paper from the FCA and on changes to the rules around financial promotions.

As part of this, the FCA has also said that it plans to extend the ban to listed bonds that contain a number of the same features (and therefore risks) as mini-bonds.

The FCA is aiming to publish the final rules by the end of 2020.

How can we help you?

Due to the heightened regulatory scrutiny around speculative illiquid securities, including mini-bonds, it is advisable to seek regulatory advice to help ensure firms do not incorrectly promote their investments to retail investors and that promotional material meets the relevant FCA rules.

Firms must be sure that any mini-bonds that do not meet the available exemptions as to the business activities that the fundraising relates to are not promoted to retail investors unless they can be sure that the investors meet the criteria as exempt individuals (high net worth or sophisticated investors). Furthermore, any promotions must meet certain criteria, including fully disclosing all costs and clearly stating all the potential risks to consumers of losing all money they invest, even where the firm promoting the investment is not regulated.

We have helped a number of companies to ensure that any financial promotions for mini-bonds, and the processes surrounding the promotion of these, are fully compliant. We also have a depth and breadth of knowledge in these areas and of financial regulatory matters in general.

Contact us on 0207 436 0630 – or email