What is a Sophisticated Investor?

If you have recently chosen a stockbroker or signed up for peer to peer lending platforms, you may have been asked to certify whether you are a ‘Sophisticated Investor.’

This phrase isn’t just a new way to boost the ego of valuable customers. ‘Sophisticated Investor’, is an official definition used by the Financial Conduct Authority, and it could have a real impact on the investment opportunities available to you.

Depending on whether you can or cannot ‘self certify’ that you meet certain criteria to call yourself sophisticated, investment providers may actually offer you different investment products.

This is because some non-mainstream investments carry such a high level of risk that the FCA has decided that they should not be promoted to ordinary consumers. Rather than banning the investments outright, the FCA permits them to be sold only to a small class of veteran investors who will certainly understand the risks they are taking on.

Am I a sophisticated investor?

If you’re wondering how to work out if you count as sophisticated or not, there’s a simple test:

  1. Do you invest in private companies in a similar fashion to BBC Two’s Dragons Den programme?
  2. Are you an investment banker or private equity partner?
  3. Are you the director of a company?

If you answer yes to any of these questions – you probably meet the requirements.

If you’re feeling particularly excluded by this definition – you’re not in the minority! I would hazard a guess that 99% of the country would fail to pass this hurdle. Personally, I don’t pass this test either.

Be honest

You may feel tempted to tell a fib and claim to be sophisticated to get access to an opportunity.

As we say in our investment training – please be honest to yourself and your investment provider! Remember that the question only exists to protect you from investment losses. There are plenty of exciting and interesting investment opportunities to choose from that don’t require self-certification.

For example, you can invest in shares or even invest in commodities without being asked to declare that you are sophisticated. Being honest won’t hold your portfolio back!

The full sophisticated investor statement

Here is the full wording of the statement you will need to sign to qualify as a self-certified sophisticated investor, taken directly from the FCA Handbook.

“SELF-CERTIFIED SOPHISTICATED INVESTOR STATEMENT

I declare that I am a self-certified sophisticated investor for the purposes of the restriction on promotion of non-mainstream pooled investments. I understand that this means:

  1. (i) I can receive promotional communications made by a person who is authorised by the Financial Conduct Authority which relate to investment activity in non-mainstream pooled investments;
  2. (ii) the investments to which the promotions will relate may expose me to a significant risk of losing all of the property invested.

I am a self-certified sophisticated investor because at least one of the following applies:

  1. (a) I am a member of a network or syndicate of business angels and have been so for at least the last six months prior to the date below;
  2. (b) I have made more than one investment in an unlisted company in the two years prior to the date below;
  3. (c) I am working, or have worked in the two years prior to the date below, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises;
  4. (d) I am currently, or have been in the two years prior to the date below, a director of a company with an annual turnover of at least £1 million.

I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me seek advice from someone who specialises in advising on non-mainstream pooled investments.

Always check the definition

I have noticed that some investment companies have begun to use the ‘sophisticated investor’ language in a similar (but different) context.

For example, Funding Circle prevents ordinary investors from investing more than 10% of their wealth on the platform unless they can self-certify as a sophisticated investor.

But the criteria they use is much broader. To qualify, you only need to have invested with them for more than one year.

This effectively works as a caution, to simply hold back customers from investing too much of their money, too quickly.

For this reason, if you are asked to self-certify as a sophisticated investor, you should carefully check the website for the precise definition being used – it might be very different from the FCA definition shown above.

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