In its comparison of the Main Market and the International Securities Market ("ISM"), the London Stock Exchange states that the ISM is "Suitable for Professional Investors only as defined by MIFID". However, there's no definition of Professional Investors in MIFID. What is a Professional Investor for the London Stock Exchange?
Definition of Professional Investor in the AIFMD
There is no definition of Professional Investor in MIFID, but there is one in the Alternative Investment Fund Managers Directive ("AIFMD"). The AIFMD regulates sales in the European Union of hedge funds, private equity funds, real estate funds and other alternative investments. Under the AIFMD, a "'professional investor' means an investor which is considered to be a professional client or may, on request, be treated as a professional client within the meaning of Annex II to Directive 2004/39/EC". The citation is to the original MIFID implemented in 2007, not MIFID II which was implemented in 2018. AIFMD also defines "retail investors" as an "investor who is not a professional investor". With those definitions in mind, we can make some sense of the London Stock Exchange's description of Professional and Retail Investors.
Definition of Professional Client by MIFID and the FCA
The AIFMD's definition of a Professional Investor refers to the definition of a Professional Client in MIFID. A Professional Client under MIFID II generally covers professionals in the finance industry, large corporate undertakings, government bodies and those that are eligible to elect to be considered a Professional Client. The figure close to the end of this article provides the full definition from MIFID II. The UK's Financial Conduct Authority ("FCA") expanded the definition to cover persons from countries outside the EU.
The result of categorizing a client as a "Professional Client" is that they don't have the full range of investor protections provided to retail investors. New listings on the LSE's ISM are not approved by the FCA and have less onerous reporting requirements, among other things.
Drafting Securities Law Disclaimers
If you look at the securities law disclaimers for offerings on not just the London Stock Exchange, but Euronext Dublin and the Luxembourg Stock Exchange, there may be undefined references to professional investors, but the defined terms link back to the definition of professional clients in MIFID. They also usually state that the target of the offer is professional clients and 'eligible counterparties', and that retail investors are not allowed to purchase the securities. That makes sense given the absence of a definition of Professional Investor in MIFID.
'Eligible counterparty' is referred to in MIFID's Article 30(2) to include the following investors:
- investment firms,
- credit institutions,
- insurance companies,
- UCITS and their management companies,
- pension funds and their management companies,
- other financial institutions authorised or regulated under Union law or under the national law of a Member State,
- national governments and their corresponding offices including public bodies that deal with public debt at national level,
- central banks and
- supranational organisations.
MIFID pushes to Member States the job of further defining eligible counterparties in respect of net worth requirements, expanding the category to include entities located outside the EU and providing for procedures to limit the scope of eligible counterparty business. The FCA has filled in those parts in its Handbook.
The full definition of Professional Client from Annex II of MIFID is immediately below.
Finally, a note on how you can use this article. This article is not to be considered legal advice and is not a substitute for advice from qualified legal counsel. Material aspects of the discussions in this article may change at any time and without further notice. Among other things, negotiations concerning the status of the UK in respect of the European Union ("Brexit") may lead to changes in the LSE's rules, the FCA's regulation, or other relevant rules and regulations.