(a) the provision of loans or finance to any person other than a member of the issuer’ s group;
(b) buying or acquiring investments (whether they are to be held directly or indirectly);
(c) buying property or an interest in property (whether it is to be held directly or indirectly);
(d) paying for or funding the construction of property.”
The exceptions are set out at COBS 4.14.18R. These include where “the relevant property is or will be used by the issuer or a member of the issuer’s group for a general commercial or industrial purpose which it carries on”.
At COBS 4.14.20(5) this exception is elucidated further by way of two examples. The guidance states that “where a retailer issues a [mini-bond] and uses the proceeds to build a shop, the debenture or preference share will benefit from the exemption because the property is used by the retailer for its own commercial activities”.
However, the guidance also states that, by contrast, “where a property developer issues a [mini-bond] and uses the proceeds to fund the costs of a property development or construction of property, which is intended to be sold, it will not benefit from the exemption because the development will not be used by the developer itself, and property development and construction services are excluded from the definition of general commercial or industrial purpose”.
However property developers can avail of a further exemption.
This is where mini-bonds are issued by a property holding vehicle to purchase or construct an income generating property in the UK.
For the purposes of this exception, an “income generating property” is defined as “a single property or multiple properties within a single development” in the UK, which “is actually used, or is intended to be used for residential or commercial purposes” and is rented by persons unrelated to the company’s directors at a commercial rate.
There is also an exception as regards promoting speculative mini-bonds to high net worth individuals and sophisticated investors.
However, this is subject to a preliminary assessment of suitability and the use of prescribed risk warnings.
Those promoting investments which avail of an exception under the new rules will need to tread carefully. In light of the recent strident criticism of the FCA as regards mini-bond regulation, it is reasonable to assume that the FCA will stringently enforce the new rules.
Indeed, the FCA is currently assessing over 200 cases where financial promotions may not have complied with its rules.
The LCF mini-bond scandal shows that the consequences for wrongdoers can go far beyond regulatory enforcement.
On 18 March 2019, the Serious Fraud Office (SFO) made four arrests in connection with the case.