Starting 8 October 2023, anyone — including a crypto issuer or business based outside the UK — who makes a cryptoasset or service available to an investor or user in the UK will need to consider the UK ‘financial promotion restriction’ (Restriction) and associated rules, breach of which is a criminal offense.
We wrote about the new regime in our alerts Marketing Cryptoassets and Services In and Into the UK: A Near-Final Regulatory Regime and Marketing Cryptoassets and Services in and Into the UK: Shifting Regulatory Sands.
This Q&A is a reminder.
What is Meant By The Restriction?
Anyone who communicates an invitation or inducement to engage in investment activity, further defined by reference to ‘controlled investments’ and ‘controlled activities’, must be authorised by the UK Financial Conduct Authority (FCA), or an FCA-authorised firm must approve the communication (the Restriction). Breach of the Restriction may result in a criminal penalty, a fine, or both, and agreements that result from the communication are voidable. The Restriction is subject to certain exclusions as noted below.
Does The Restriction Apply to Communications Made By Non-UK Businesses, Including Those Based in The US?
Yes. The Restriction applies to any promotion that ‘is capable of having an effect in the UK’. This includes any communication, including a website or app, that a person in the UK can access, regardless of where the website is hosted or the app offered from.
Which Cryptoassets are Subject to The Restriction?
The Restriction already applies to cryptoassets that have the characteristics of a share, bond, or other regulated investment (Security Token). Via an extension to Financial Promotion Order (FPO), the Restriction will apply to any ‘qualifying cryptoasset’ (QCA) which the FPO adds to the list of ‘controlled investments’.
Using the general UK legislative definition of a cryptoasset as a starting point, a QCA is ‘any cryptographically secured digital representation of value or contractual rights that (a) can be transferred, stored or traded electronically, and (b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology)’.
The FPO narrows this by defining QCAs to exclude from the Restriction:
- Non-fungible tokens (NFTs)
- Electronic money (EMT)
- Fiat currency, including digitally issued fiat currency (CBDCTs)
- Cryptoassets that can only be transferred or sold by way of redemption with the issuer and the use of which is limited to acquiring goods and services in three specific instances (FPO Utility Tokens)
The definition also excludes Security Tokens as these are already subject to the Restriction.
Are Utility Tokens Excluded From The Restriction?
As noted above, FPO Utility Tokens are excluded from the Restriction. The definition of an FPO Utility Token is narrower than the definition of a utility token in the FCA guidance on cryptoassets (FCA Utility Token), which did not recognise a restriction on secondary market trading. Therefore, unless an FCA Utility Token has the characteristics of an FPO Utility Token, it will fall within the QCA definition and be subject to the restriction.
What Cryptoasset Services Are Subject To The Restriction?
Activities such as:
- Making arrangements with a view to deals in QCAs, which could include app providers depending on the app’s functionality
- Arranging deals or dealing as agent in QCAs, which could include the activities of crypto exchanges depending on their business models
- Dealing as principal in QCAs, which would include issuing a QCA, as the exclusion for issuing one’s own securities in the FPO has not been extended to QCAs
Are There Exclusions From The Restriction?
Yes. Two types of exclusions will take promotions of QCAs or relevant controlled activities outside the scope of the Restriction:
- QCA-specific exemptions
- General exemptions applying to all controlled investments
The QCA-specific exclusion is for QCA promotions that are communicated by or on behalf of an FCA-registered cryptoasset exchange or custodian (FCA Crypto Businesses). This exclusion has the effect that FCA Crypto Businesses, which are not FCA-authorised firms for the purposes of the Restriction, can communicate and approve promotions about their own businesses.
The general exemptions include financial promotions directed at investment professionals, certified sophisticated investors, and high-net-worth corporations and associations. Subject to requirements on disclaimers and similar language to be contained in promotions, this should allow QCA issuers and intermediaries to offer QCAs and allow QCA service providers to offer those services to institutional investors/users.
What Limitations Are There on The Types of Investor Where an FCA-Authorised Firm Communicates or Approves A Promotion in Compliance With The Restriction?
The FCA rules governing the promotion of QCAs limit direct-offer financial promotions — i.e., those that contain an offer to which the investor can respond — to persons certified as one of the following:
- A ‘high-net-worth investor’, requiring a net annual income of £100,000 or net assets of £250,000 or greater
- A ‘sophisticated investor’, which includes various tests different to those for a certified sophisticated investor under the FPO
- A ‘restricted investor’, the residual category which requires the investor to adhere to a limit of 10% net assets in making the investment in a QCA
What Requirements Are Imposed on A Promotion Where An FCA-authorised Firm Communicates or Approves That Promotion in Compliance With The Restriction?
The FCA rules governing the promotion of QCAs impose requirements with respect to:
- A 24-hour ‘cooling off’ period between the time investors receive the promotion and when they can act on it
- Appropriateness tests
- Clear risk warnings using prescribed wording
- Risk summaries specific to the QCAs in question
- Incentives to invest in QCAs
To discuss the contents of this alert, please contact the authors or your usual Goodwin contact.