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Mini-bonds – Banned for the Long Term?25th June 2020 Corporate
Following its 12 month restriction on the sale of so called “mini-bonds” and preference shares with similar rights (speculative illiquid securities in FCA parlance) with effect from 1 January 2020, the FCA has confirmed that it intends to make those restrictions permanent and released a consultation paper in relation to that proposal and some changes to the regime. They propose to build on the current restrictions, extending them so that they apply to listed bonds which are not “regularly traded” and adding some exclusions and clarifications to ensure the ban achieves their objectives.
Currently certain listed bonds are treated as “readily realisable securities” under the FCA Rules and therefore are outside the scope of the restriction on sales to retail investors. The FCA has noticed a trend of issuers using this exemption, mostly through non-UK markets, to allow bonds which would otherwise have been caught by the ban to be marketed to retail investors. There is often no real liquidity in those bonds, and therefore no real opportunity for investors to exit their investment before the maturity date. The FCA is also concerned that the status of bonds as being listed may confuse retail investors who assume that is a badge of quality. In order to prevent the abuse of this exemption, the FCA proposes to update the rules so that it only applies where a bond is “regularly traded”, or which can be reasonably be expected to be regularly traded when it begins to be traded.
Further proposed changes to the rules include:
- excluding special purpose vehicles for single-company investments from the restriction, as long as the company is funding its own commercial or industrial business, or that of a group entity. As before, for these purposes using funds raised to lend to third parties, buy or acquire investments, or buy or fund the construction of property (subject to limited exemptions) is not a valid “commercial or industrial purpose;
- making some clarifying changes to ensure they function as intended and are clear for market participants;
- clarifying the order of events which must take place before a speculative illiquid security can be promoted to a potential investor. In particular, they wish to make it clear that client vetting must take place before the potential investor is given access to a relevant financial promotion.
The fallout from the collapse of London Capital & Finance, and similar businesses, continues to concern the FCA. They are clearly deeply concerned about the potential for retail investors to take risks they may not understand and suffer serious losses as a result. It is clear that they are going to take steps to block any perceived loopholes in their restrictions on the promotion of speculative illiquid securities and prosecute people who breach that restriction. Proper legal advice should always be taken in connection with any debt issue.
JMW Solicitors LLP is pleased to advise on bond issues and other fundraising together with applicable regulation. If you need any assistance in relation these or other legal issues please contact please contact us.
This note is for general guidance only and should not be used for any other purpose. It does not constitute, and should not be relied upon as legal advice. It relates to the position in England only.
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This note is correct as of 25 June 2020