Whether you are raising finance for your company under the SEIS/EIS or not, you may be required to obtain a Section 21 sign off, as required by the Financial Services Market Act 2000 (“FSMA” or “the Act”). Certain finance raisings benefit from this additional step in order for them to become, what we term “investment ready” (as explained in another of our blogs called “5 things a start-up company should do before raising equity financing”). It would be fair to say that the Act is a complex piece of legislation, as it governs the documentation used for marketing investments and is there to protect investors. As companies can promote their shares to some degree without the involvement of a financial professional, the Section 21 sign off process is an option for the company that will give investors a higher degree of assurance that the representations made in marketing documents have been vetted by professionals whose firm is “authorised” by the Financial Conduct Authority (“FCA”) such as Sapphire Capital Partners LLP. Listed below are some common questions we get asked with relation to Section 21 sign offs: 

Q1: What companies / investment promotions require a Section 21 sign off?

A: Companies do not require a Section 21 sign off but obtaining it allows the marketing of the investment to potential investors beyond those certified as sophisticated investors or high net worth individuals. Basically, the investment gets approved by an authorised firm (the one that conducts the Section 21 sign off) and marketed under the FCA Handbook Conduct of Business (“COBs”) rules. COBs allows for the investment to be marketed to a wider range of retail investors. The benefit of this is that as the investment opportunity can therefore be marketed to a wider audience, it hopefully should attract more investment.

Q2: What is involved with obtaining a Section 21 sign off?

A: The FCA “authorised” firm will conduct a detailed due diligence on the statements made in the investor documentation. In essence, everything will be checked and verified by supporting documentation.  This can be a time consuming and detailed process with every substantive statement in the investor document being checked against supporting third party evidence. For this reason, the Section 21 process can be expensive (see next Q&A below).

Q3: Why are FSMA Section 21 sign offs expensive?

A: Because there is a significant amount of work involved in confirming that every statement and/or representation made in the investor documentation is factually accurate and can be supported by either third party confirmation or some sort of official documentation. For example, if a statement about the experience of a director is made in the investor documents, the authorised person will most likely need to review and check the director’s resume or C.V. and if necessary contact prior employers to ascertain whether the information provided is factual.

Q4: How long does a Section 21 sign off take to complete?

A: Depending on the amount of representations made in the investment documents, and the level of cooperation from company management and third parties for substantiating the statements and figures presented, a typical Section 21 sign off can take up to two weeks. If the document is lengthier than normal it may take longer. 

Q5: What sort of evidence do you need to back up a Section 21 sign off?

A: Documents substantiating representations made in investment documents will vary according to the statements made. Although there is no definitive list of documents required to be provided for a Section 21 sign off, there are a number of documents that we would start our due diligence work on, such as historic audited accounts, management team C.V.s, references, third party confirmations, material contracts signed, bank statements, incorporation documents, media/news coverage etc. Any individual writing investor documents (who wishes to obtain a Section 21 sign off) should ensure they keep a detailed record of all supporting documents that back up statements made in the investor documentation. 

Q6: Who performs the Section 21 Sign off?

A: Section 21 imposes a restriction on the communication of financial promotions by “unauthorised” persons. The only persons who can communicate invitations to invest are firms “authorised” by the FCA or alternatively the content is approved by an “authorised” firm. 

Q7: What type of documents have to undergo Section 21 sign off?

A: If investor documents are not Section 21 approved, they can typically only be given to (and investment monies can only be received from) high net worth and sophisticated investors. If the investor documents are Section 21 approved, it can be circulated to and investment monies received from high net worth/sophisticated and restricted investors (being investors applying under 10% of their net assets, excluding certain assets, last and this year in these types of investments) plus in all cases the investor applicant must pass a test administered by the authorised person that they have the necessary experience and knowledge in order to understand the risks involved in relation to investing in such companies (this is done by the investor applicant filling in a questionnaire in the investment application form). Any documents which promote an investment opportunity need to be signed off. They may be printed documents, a radio broadcast or ad, a YouTube video, an in-person presentation, telephone calls, emails and pretty much any other method that information can be communicated.

If you wish to explore further whether a Section 21 sign off would be beneficial to your finance raise, please feel free to contact us with any questions you might have. Please note that Sapphire Capital Partners LLP does not provide any Section 21 sign offs outside our own firm and Appointed Representatives. Special thanks to Victor Hawrych of Edwin Coe LLP for assisting in the legal accuracy of this blog which should not be relied upon as legal advice.