Borrowing From Friends and Investors for Property Deals: The Rule Nobody Mentions
Use other people's money is the most repeated sentence in property education. What is repeated far less often is that inviting people to invest, whether in your deal, your company or your loan note, is an activity Parliament has regulated for decades, under the Financial Services and Markets Act 2000 since December 2001 and under the Financial Services Act 1986 before that, and the restriction is backed by criminal law. This article explains what the financial promotion restriction is, the kinds of activity that can engage it, how far the well-known exemptions actually reach, and why the right response is a solicitor rather than a template. It is general information, not legal advice.
The rule exists, and it is not new
Section 21 of the Financial Services and Markets Act 2000 restricts communicating, in the course of business, an invitation or inducement to engage in investment activity, unless the communication is made by an authorised person, approved by an authorised person who holds the Financial Conduct Authority's approver permission, or covered by a specific exemption. That approver permission matters more than it sounds. Since February 2024 an authorised firm may only put its name to someone else's financial promotion if the regulator has granted it permission to do so, or the approval falls within one of a few narrow exceptions, so the pool of firms able to sign off your material is a good deal smaller than it was and considerably smaller than most people raising money assume.
What breaching it means
Breach is addressed by section 25, which makes unlawful financial promotion a criminal offence. In the Crown Court it carries up to two years' imprisonment, an unlimited fine, or both; in the magistrates' court the maximum is six months' imprisonment, an unlimited fine, or both. There are defences, but narrow ones: that you believed on reasonable grounds that the content had been prepared or properly approved by an authorised person, or that you took all reasonable precautions and exercised all due diligence to avoid the offence. A separate provision, section 30, deals with the civil consequences. Where someone enters into an agreement as a result of an unlawful communication, that agreement is unenforceable against him, and he is entitled to recover the money or property he handed over together with compensation for any loss he suffered by parting with it, although the court keeps a discretion to let the agreement stand where it considers that just and equitable. That is the whole point, stripped of the statutory language: promoting investment is a regulated communication; breaking the restriction is a criminal offence, and it is also something the Financial Conduct Authority can pursue through the civil courts for an injunction or an order that the money be handed back, which in practice is the commoner outcome; and the deals built on it can unwind.
What can catch a property investor
The restriction is about communications, and it is indifferent to how casual they feel. Depending on the structure and the facts, activity of the following kinds can engage it: pitching your deal to a room and inviting funds; posting on social media that investors are wanted for a project offering a stated return; circulating a deck for shares in your property company or for loan notes; and, in some structures, even one-to-one approaches to acquaintances, colleagues or relatives where the arrangement amounts to an investment. Not every borrowing is caught. A straightforward loan between two people, on terms they negotiate privately, sits differently from an offer of shares, a fund-like pooling of money, or a marketed loan-note programme. The line runs through definitions such as investment activity, controlled investment and in the course of business, which is precisely where lay confidence goes to die. The honest position for a non-lawyer is not that this is fine; it is that this is a legal question with a right answer, and a solicitor can give it to you before you send the message rather than after.
The exemptions are narrower than the folklore, and narrower than the audience assumes
There are exemptions, the best known being those for certified high-net-worth individuals and self-certified sophisticated investors. Before anything else about them, note what they actually cover, because this is where property people come unstuck. Both are confined to a defined list of investments: shares and debt instruments in unlisted companies, alternative finance investment bonds, instruments conferring rights over those, and units in a fund that invests wholly or predominantly in the same, and in every case only where the investor cannot be asked to put in more than he has committed. An interest in the land itself, or a bespoke arrangement that does not fit that list, sits outside the exemption altogether, and promoting a pooled scheme brings in a further restriction of its own under section 238 of the Act. A signed certificate does not cure a structure the exemption was never drawn to reach.
The conditions, and the thresholds that moved and moved back
First, the exemptions carry formal conditions. There must be an investor statement in the form prescribed by Schedule 5 to the Financial Promotion Order 2005, completed and signed within the twelve months ending on the day the communication is made, and the promotion itself must carry a prescribed warning, given in a prescribed way, together with the name and contact details of whoever is making it. The rules do make one small allowance for slips, in that a defect in the wording or form of a statement will not defeat the exemption unless it alters the meaning or the paragraphs that must appear in bold have not been put in bold. That is a narrow indulgence and no substitute for getting the paperwork right, because everything else has to be executed as written. Second, the thresholds moved and then moved straight back, which makes second-hand summaries unreliable in both directions. From 31 January 2024 the qualifying figures for the certified high net worth exemption were raised to income of at least £170,000 or net assets of at least £430,000, the company director turnover test for self-certified sophisticated investors went up to £1.6 million, and the alternative test based on past investments was scrapped. Within two months the government reversed all of it. Since 27 March 2024 the figures have stood once again at income of at least £100,000, not counting any one-off pension withdrawals, or net assets of at least £250,000; the turnover test is back at £1 million; and the alternative test of having made two or more investments in an unlisted company in the preceding two years has been restored. Statements drawn up under the short-lived higher thresholds could be used until 30 January 2025 and have had no effect for any purpose since. Not everything went back, though, because the additional requirements introduced at the same time were left standing, including the duty to give your name and contact details in the promotion itself. The practical consequence is that a summary written at almost any point during 2024 is likely to mislead you, whichever set of figures it happens to quote, and a good many of them are still circulating.
Why this appears on an accountant's website
Because we see the aftermath. In the property-education world, raising private finance is often taught as a mindset exercise: confidence, network, pitch. In the material we have reviewed, the regulatory dimension has been conspicuously thin, with the emphasis falling on how to ask and how confidently to ask rather than on whether the asking is itself a regulated act. Those investors are frequently the raiser's own community, and when a deal fails and the money is gone, the discovery that the promotion was unlawful compounds a personal tragedy with a legal one. An accountant's proper role here is limited and clear. We do not advise on financial services law, and this article is not that advice. What we do is recognise the exposure in a client's affairs, say so plainly, and insist on the referral: a solicitor with financial-promotions expertise, before any approach is made, with the structure on the table.
The practical takeaways
If you are considering raising money from others for property: treat every outward communication about it as potentially regulated; take legal advice on the structure before the first approach rather than after the first cheque; check that any exemption you plan to rely on actually reaches the investment you are offering, and not merely the investor you are offering it to; assume its formal conditions must be executed exactly; and keep a record of what was communicated to whom. If you have already raised money and none of this featured at the time, take the same legal advice now rather than later, so that a solicitor can establish where you actually stand and tell you what, if anything, can properly be done about it. None of this says private capital has no place in property. It says the invitation is the regulated moment, and the people most commonly caught out are not cynics but enthusiasts who were never told the rule existed.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.