3. 3. Key Features Of The Private Financing Platform Framework
3.1 Definition of Regulated Activity
The Regulated Activity of Operating a Private Financing Platform is defined in Schedule 1, Chapter 17C, Section 73E of FSMR and captures a number of alternative financing arrangements.
As retail investors, in general, may not fully appreciate the high risks associated with the transactions facilitated through a PFP, the FSRA intends to restrict the accessibility to PFPs under the PFP Framework to primarily Professional Clients.
PFP Operators generally do not provide financial advisory services to clients. Under these circumstances, the onus is on clients to seek independent financial advice or to make their own evaluation of the risks associated with any potential loan or investment. Professional Clients are considered to be more sophisticated and have more resources and capacity to make informed decisions on prospective debt and equity instruments offered through a PFP after considering the inherent risks.
There may be instances where a PFP Operator would like to offer its services to potential, sophisticated clients who do not meet the current financial criteria to be classified as a Professional Client. The FSRA may consider allowing the participation of these clients where the FSRA considers them able to adequately understand the risks associated with PFP Transactions, based on their knowledge, skills and experience. In such circumstances, the FSRA may impose other appropriate conditions or safeguards upon the PFP Operator. Further, the PFP Operator’s FSP must permit it to deal with Retail Clients.
All clients must be pre-screened and on-boarded by the PFP Operator, in accordance with COBS Chapter 2, before being given access to the PFP.
3.3 PFP Prospects
A PFP Prospect must be a Body Corporate. The FSRA is of the view that a PFP would be an inappropriate forum for use by natural persons seeking financing for a business venture for a number of reasons, including:(a) the inappropriateness of a PFP for the formation of partnerships between individuals; and(b) the undesirability of posting personal information enabling the clients of a PFP to ascertain the creditworthiness of an individual.
The FSRA is additionally of the view that a PFP would be inappropriate for capitalising ventures at the pre-incorporation stage of their development, given the lack of track record and the limited scope of potential due diligence that may be undertaken.
3.4 Exempt Offers
A Security being offered to the public within the ADGM must be accompanied by a Prospectus under Section 61 of FSMR, unless it qualifies as an Exempt Offer. Accordingly, the FSRA will only allow a financing proposal to be published on a PFP where it qualifies as an Exempt Offer through satisfying any of the criteria set out in Markets (“MKT”) Rule 4.3.1, also bearing in mind Rules 4.3.2 and 4.3.3, which are included in Appendix 1 of this Guidance.
3.5 Client Assets
As best practice, a PFP Operator should appoint an Eligible Custodian to safeguard Client Assets. However, alternative arrangements may be permitted by the FSRA where appropriate safeguards are implemented.
In the case that a PFP Operator does not appoint an Eligible Custodian, it must comply with:(a) the higher capital requirements set out in Prudential – Investment, Insurance Intermediation and Banking (“PRU”) Chapter 3 and Section 4.3(f) of this Guidance; and(b) where applicable, the following Conduct of Business (“COBS”) Rules:(i) Chapter 14 – Client Money Rules (if holding or controlling Client Money, Providing Custody or Arranging Custody);(ii) Chapter 15 – Safe Custody Rules (if holding or controlling Client Investments, Providing Custody or Arranging Custody); and(iii) Chapter 16 – Recovery & Resolution Planning for Client Money & Safe Custody Assets (if holding Client Money or Client Investments).