On 19 April 2021, HM Treasury issued a consultation document on the regulation of non-transferable debt securities (mini-bonds).

Non-transferable debt securities (NTDS), commonly referred to as ‘mini-bonds’, are unlisted bonds typically issued by companies to retail investors in order to raise finance. As non-transferable securities, investors cannot sell their investment, which normally must be held until maturity. The issuance of NTDS is, in general, not a regulated activity for the purposes of the Financial Services and Markets Act 2000 (FSMA), although the marketing of such products falls within the scope of the Financial Promotions Regime.

In chapter 4 of the consultation document HM Treasury outlines the case for further regulation relating to the issuance of NTDS and proposes two options for regulatory reform:

• Making the direct-to-market issuance of certain NTDS where the proceeds of the issue are used to on-invest or on-lend a regulated activity. The Government’s initial view is to proceed with this option, doing so by amending the operation of Article 18 of the Regulated Activities Order (RAO) thereby avoiding the need to amend the scope of MiFID. To avoid the need to amend the scope of MiFID, the option to bring the issuance of NTDS within the regulatory perimeter could be implemented by providing a specific exception to Article 18 of the RAO (which currently provides an exclusion from the regulated activity ‘dealing in investments as principal’ for firms who issue their own debt securities) so it does not apply to the issue of non-transferable debt securities if the issuer uses the funds raised to on-lend or invest in other third-party projects. In the Government’s view this would be preferable to amending the scope of MiFID, as it would provide the opportunity to explicitly define what is intended to be captured by the exemption and what is not. The FCA would have direct oversight over those firms that fall within the regulatory perimeter and would have the power to supervise NTDS issuers’ compliance with relevant regulatory rules. The FCA would have oversight of the conduct of business, product governance and systems and controls of relevant direct-to-market NTDS issuers in a way that they do not currently have.
• Extending the scope of the Prospectus Regulation to cover NTDS, so that public offers of NTDS would require an FCA approved prospectus. Under this option, the scope of the Prospectus Regulation would be extended to cover public offers of NTDS. This change would mean any issuer wishing to offer NTDS to the public in the UK would be required to produce a prospectus, which would have to be approved by the FCA before the offer could take place. Potential investors would be able to review the prospectus before deciding whether to invest in the securities being offered. If the requirement to provide a prospectus was extended to NTDS, the Government believes that consideration would need to be given to whether the existing €8 million exemption threshold for public offers of securities remains appropriate for NTDS. An alternative option would be to remove the €8 million exemption for NTDS (but not for other types of security), in which case issuers of NTDS would need to issue a prospectus where they are seeking to raise more than €1 million over a 12-month period (assuming the issue was not otherwise outside the scope of the Prospectus Regulation).