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What is a sophisticated investor?

ninja learning Oct 05, 2020

It’s not someone who wears designer suits and likes fine wines!  If you’re getting into the property market it can be tempting to get someone with money to invest in your property purchase, to help to get your portfolio moving.  But any joint venture (JV) partner who is investing cash MUST qualify as a sophisticated investor - according to the FCA.

This is also known as Directive PS13/3.

It covers a range of categories of investment - and includes property deals.  So, before you consider getting into a JV, you need to be sure that your potential investor qualifies as a sophisticated investor or falls into one of the excluded categories.

What is an Unregulated Collective Investment?

Any financial deal that offers a split of the profits and, by definition, a split of the losses; and you cannot guarantee that your project will make a profit.

The FCA’s viewpoint is that an unsophisticated investor can’t do an accurate analysis of what is - or is not - a good investment.

There are five criteria and an investor qualifies as a sophisticated investor by meeting any one these:

  1. An annual salary of £100K+
  2. Independent assets of £250K+ (not including equity in their main residence)
  3. Employed in an investment capacity in financial service industry i.e. a professional investor.
  4. Director of £1M+ turnover per annum company
  5. A bona fide angel investor in business start-ups

These categories assume a degree of high-level decision making, which will contribute to that person’s ability to effectively analyse investment opportunities.

There are two exclusions to these criteria:

  1. A family member
  2. A friend of long standing i.e. several years

The two exceptions work on the basis that someone would not exploit or disadvantage these types of very personal relationships.

How will the FCA know if you ignore the Directive?

At the outset, they probably won’t, but it only takes a deal to go pear-shaped for a disgruntled JV partner to look for recompense.  If they discover there is a way to get their money back, most will take it.

Claiming ignorance of the Directive is no excuse.  As far as the FCA is concerned, if you are marketing an Unregulated Collective Investment, you know what you’re doing - and the rules of the game.  Even a signed disclaimer from your JV partner may not be enough for the FCA to find in your favour, so play the JV game very carefully.

My advice is always to use bridging rather than a JV partner - and it will cost less in the long run.

 

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