While the case for diversifying a portfolio into alternatives is well understood, the practical challenges can be hard to overcome. EIS arrangements and crowdfunding platforms are an increasingly popular option to access alternative investments and are not restricted by the same obstacles that apply to unregulated collective investment schemes. As a consultant with UK regulatory consultancy Bovill, Gillian presented on how the regulatory regime applies to these types of investments and what intermediaries need to consider when recommending them.

1. EIS & Crowdfunding:
regulatory considerations
Alternative Investment Summit, November 2013
Gillian Roche-Saunders

2. Summary this morning
•
Increased focus on product design – FCA looking to use new
powers and will be vigilant for regulatory arbitrage;
•
Focus on the promotion of ucis unlikely to go away – 2 tier
retail client structure will help;
•
Direct promotion by product providers likely to become more
difficult, particularly where an appropriateness assessment
needs to be made;
•
New requirements may lead to tension between marketing
and compliance functions.
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3. EIS options
Single company raise
Fund: UCIS
Discretionary managed portfolio
Fund: Non-UCIS
Shares allocated to investor

4. EIS options
Single company raise
• Least complex route
• Most likely to come across non-regulated options meaning less
investor protections
• Challenges for article 3 MiFID advisers
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5. EIS options
Single company raise
Discretionary managed portfolio
• Investment manager will need permission to manage investments
• Likely to be a MiFID firm – useful if you are an article 3 exempt
MiFID adviser
• Adviser charges will usually apply
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6. EIS options
•
•
•
•
Investment manager should have permission to manage AIFs
Adviser charges will usually apply
Investor may or may not be fund managers client
You will remain responsible for suitability
Fund: UCIS
Fund: Non-UCIS
Unregulated Collective Investment Scheme – UCIS
Non-mainstream Pooled Investment - NMPI
Alternative Investment Fund - AIF
Collective Investment Undertaking - CIU
Retail Investment Product - RIP
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7. General EIS tips
 EIS will not be suitable for everyone
 Sell the investment as well as the tax reliefs
 Understand the EIS structures and select appropriate one
Our concern is that they may be marketed to consumers
based primarily on the tax incentives offered, with investors not
fully understanding the risks involved.
FSA Financial Promotions Industry Update, March 2011
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8. Crowdfunding options
regulated
Rewards
based
Non-financial
reward
unregulated
Investment based platforms
equity and debt securities –
direct or indirect
Loan based platforms
“peer to peer” loans
made to receive interest
and repayment of capital
Donations
based
Giving money
in support
unregulated
regulated
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9. Investment based crowdfunding
FCA Consultation Paper 13/13
Direct offer financial promotion of shares or debt securities restricted
to
•Professional clients
•Sophisticated Investors (with a pre-assessment) *
•High Net Worth Investors (with a pre-assessment) *
•Retail investors receiving advice or managing services
•Retail investors who limit unlisted shares/ debt securities to 10% of
their net investable portfolio *
* Appropriateness assessment is also required by the platform
If investment is packaged like a UCIS, the NMPI rules will apply.

10. Loans based crowdfunding
FCA Consultation Paper 13/13
•From April 2014 consumer credit will be regulated
•New RAO activity/ FCA permission: “operating an electronic system
in relation to lending”
•Interim permission for firms with valid OFT licence
•Proposed that FSCS cover will not apply
•Websites and adverts would not yet be compliant
•Financial promotions rules will apply

11. Loans based crowdfunding
Some things to look out for when advising:
•Creditworthiness assessment process
•Rates of return post charges and default rates
•Tax implications of lending
•What protections and processes are in place for ‘late payments’,
‘defaults’ and early exits

12. General Crowdfunding tips
 Understand level of due diligence undertaken by platform
 Social / ethical investment not exempt from rules
 “Information asymmetry” risk mitigated by advice
 Risk associated with unlisted companies remain
 Check client money protections
 Businesses at risk of lending money by way of business!
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