A legal opinion on Populous World Ltd (UK).
London. Friday 11th May, 2018.
POPULOUS WORLD LIMITED
1. By instructions received on 23rd October 2017 and confirmed on 24th October 2017, I have been asked to advise Populous World Limited, (“Populous”) on certain regulatory issues arising or potentially arising under the Financial Services & Markets Act 2000, (the “FSMA”) in connection with the launch by Populous of a peer to peer (“P2P”) platform which auctions invoices by matching sellers of invoices with buyers of invoices who are willing to provide invoice discounting facilities to the relevant seller, (the “Platform”).
2. This advice is provided subject to the following assumptions, limitations and definitions:
a. this advice is predicated on the factual background and factual assumptions set out below under the sub-heading ‘Background’ being correct;
b. if any of the background facts or assumptions set out below are not correct, instructing solicitors are requested to contact me as a matter of urgency as it may affect the contents of this advice;
c. this advice does not address any issues relating to the issuance and/or buyback of Populous Platform Tokens, (“PPT”) and the initial coin offering (“ICO”) which I understand from section 4.0 of the Populous Business Plan (contained in the papers presented to me) occurred earlier this year;
d. I have not been provided with a copy of the invoice sale and purchase agreement or any other contractual documentation proposed to be entered into between buyers and sellers following the auction process; and
e. I have not been provided with a link to and thus, have not reviewed the Populous website and the Platform.
3. This advice is limited to matters of English law and the law is stated as at 10th November 2017.
4. I have been provided with copies of two key documents produced by Populous, namely: the ‘Business Plan’ and a ‘White Paper’. In addition, I have reviewed the responses received from Steve Williams of Populous contained in an email dated 26th October 2017 (and forwarded to me by instructing solicitors) to the various questions I posed to Populous by email dated 25th October 2017.
5. I have also noted the information conveyed to me during my telephone conference on 27th October 2017 with instructing solicitors and with Steve Williams of Populous.
6. Based on the information referred to above in paragraphs  and  of this advice, I understand that Populous will establish and operate the Platform. The Platform is a P2P platform where sellers of invoices can enter certain invoices into an auction process whereby the invoices (and by implication the sellers) are matched with willing buyers of the invoices. The buyer will then purchase the invoice from the seller at a discount to the face value of the invoice, so as to provide cashflow to the seller.
7. I understand that the following features attach to the Platform:
a. the Platform will utilise blockchain technology and will be built using ‘Extensible Business Reporting Language’ data, (“XBRL Data”). I understand that XBRL Data is a freely available global standard for exchanging business information, (p.5 White Paper);
b. using the technologies referred to above, a credit risk system will be created and used on the Platform which uses credit scoring and bankruptcy formulae (such as the Altman Z - score) to provide credit risk analysis on the invoice sellers, companies linked to the relevant sellers and the sellers’ customers to whom invoices are issued, (see p.3 and p.9 White Paper);
c. buyers and sellers must register with the Platform before they can use the Platform and enter the auctions, (p.13 White Paper);
d. only limited companies can register as sellers on the Platform, (see Steve Williams email dated 26th October 2017);
e. invoice buyers on the Platform will be individual natural persons, (see Steve Williams email dated 26th October 2017);
f. the Platform administrator will undertake anti money laundering, credit checks and due diligence on prospective buyers and sellers on the Platform; verify seller company data and will approve the relevant buyer and seller accounts, (see ‘Platform Interactions’ diagram p.15 White Paper);
g. using the credit risk scoring system referred to above at subparagraph (b), the Platform administrator will generate the relevant credit score for the invoices offered for sale in the auction, (see ‘Platform Interactions’ diagram p.15 White Paper);
h. the auction itself will be run by the Platform administrator and Platform systems, (see ‘Platform Interactions’ diagram p.15 White Paper);
i. the ‘currency’ of the site is ‘Pokens’;
j. once registered with the Platform, a prospective buyer of invoices must credit their virtual account on the Platform with a fiat currency such as Sterling which are then exchanged into Pokens, (see ‘Platform Interactions’ diagram p.15 White Paper);
k. the fiat currency will be exchanged into Pokens on a 1:1 basis, (p.17 White Paper; and see section 5.3 Business Plan);
l. bids are placed and sale proceeds are distributed in Pokens;
m. I am instructed that the Pokens cannot be used outside the Platform and are not presently recognised as payment tokens or value by third parties other than Populous and the auction participants, (telephone conference 27th October 2017);
n. whilst I am instructed that Pokens can be traded on an exchange, they must be exchanged back into a fiat currency before a holder of Pokens can realise the same, (telephone conference 27th October 2017);
o. once the auction process is complete, the Platform administrator will distribute the sale proceeds to the relevant seller and the seller’s account will be credited with Pokens to the sale value of the invoice within 24 hours, (see Steve Williams email dated 26th October 2017; and see ‘Platform Interactions’ diagram p.15 White Paper; and see section 4.5, Business Plan);
p. the sale value of an invoice will be a fixed percentage of the face value of the invoice, (p.12 White Paper);
q. I understand that once the auction process is complete, a discrete contract will be entered into between buyer and seller under which title to the relevant invoice will transfer to the buyer, (telephone conference 27th October 2017; and see Instructions / email from Akin Williams dated 26th October 2017);
r. it follows that the buyer will acquire title to the invoice and will assume the credit risk comprised in the invoice in the event that the invoice goes unpaid, (telephone conference 27th October 2017);
s. I am instructed that the seller will chase and collect payment of the invoice as agent for the buyer, (telephone conference 27th October 2017);
t. the Platform administrator will liaise with the invoice seller and will chase the seller for payment of the proceeds of payment of the invoice once received by the seller, (telephone conference 27th October 2017; and see ‘Platform Interactions’ diagram p.15 White Paper);
u. if/when the invoice is paid by the addressee and monies remitted to Populous, Populous as Platform administrator will credit the buyer’s account with the payment proceeds and the difference between the payment sum and the price paid to purchase the invoice (which should equate to the discount) will represent the buyer’s return on funds; and
v. when a buyer or a seller wishes to withdraw their Pokens from the Platform (and convert the same back into a fiat currency) they must pay a transaction fee to Populous, (section 4.6 Business Plan).
8. As noted above, if any of the factual background and/or assumptions listed above are incorrect, then instructing solicitors are requested to contact me as soon as possible as it may affect the contents of this advice.
9. Strictly subject to the detailed advice set out below and predicated on the factual background related above:
a. for the reasons discussed in detail below, I do not consider that by establishing and operating the Platform Populous will undertake the regulated activity of ‘operating an electronic system in relation to lending’ for the simple reason that the agreements facilitated by the Platform do not constitute ‘article 36H agreements’;
b. for the reasons discussed in detail below, I do not consider that by issuing Pokens, Populous will undertake the regulated activity of issuing ‘electronic money’ as I consider that presently, Populous may rely on the ‘limited network’ exclusion at regulation 3, Electronic Money Regulations 2011;
c. Populous and instructing solicitors should note very carefully the important caveats set out below in my advice as it relates to the issuance of electronic money and in particular, the new reporting requirements which come into force in January 2018 regarding persons who rely on the ‘limited network’ exclusion;
d. I do not consider that the financial promotions regulatory regime applies to the Populous website and the Platform on the basis that the website and the Platform do not relate to ‘controlled activities’ and/or ‘controlled investments’; and
e. Populous and instructing solicitors should note very carefully the important caveats set out below in my advice as it relates to the application of the financial promotions regime to the Populous website, the Platform and the classes of prospective buyer to whom the Platform should be promoted and directed.
10. Based on the description of the Platform set out above, there are two immediate ‘regulated activities’ which it is possible Populous may undertake in connection with the establishment and operation of the Platform, namely:
a. the regulated activity of ‘operating an electronic system in relation to lending’; and
b. with reference to the issuance of Pokens, the regulated activity of ‘issuing electronic money’.
11. I shall address each regulated activity in turn. However, as a precursor to that discussion it is important to note the significance of undertaking a ‘regulated activity’ by way of business in the United Kingdom.
12. Under s.19(1) FSMA, a person may not undertake ‘regulated activity’ in the United Kingdom by way of business unless that person is either a person authorised and regulated by the Financial Conduct Authority, (the “FCA”) to undertake the relevant activity, or that person qualifies as an exempt person for the purposes of the FSMA. This provision is referred to as the ‘general prohibition’.
13. A person who undertakes regulated activity by way of business without being either an authorised person or an exempt person and thus breaches the general prohibition commits a criminal offence which is punishable by fines and/or imprisonment, (s.23 FSMA; and see further, Perimeter Guidance Manual (PERG) which accompanies the Financial Conduct Authority Handbook of Rules and Guidance, (the “FCA Handbook”) at PERG 2.2.1).
14. The relevant regulated activities and regulated investments are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, (the “RAO”). (Instructing solicitors will note that on the basis that Populous will establish and operate the Platform as a commercial enterprise, there is no real question that Populous will carry on the activity of operating the Platform ‘by way of business’. Accordingly, I have not addressed this question in this advice).
Operating an electronic system in relation to lending
15. Under article 36H RAO, it is regulated activity for the purposes of the RAO to ‘operate an electronic system in relation to lending’. The activity is aimed primarily at capturing P2P platforms, (PERG 2.7.7H).
16. By operating the Platform, Populous will carry on the activity of ‘operating an electronic system in relation to lending’ if all the following conditions are satisfied (see also PERG 2.7.7H):
a. the Platform must facilitate persons becoming the lender and borrower under an ‘article 36H agreement’. I have discussed below at paragraph  of this advice what is meant by an ‘article 36H agreement’ and the importance of this concept;
b. the electronic system operated by Populous via the Platform must be capable of determining which agreements should be made available to each of the lender and the borrower, whether this is as a result of general instructions given to Populous by the lender and/or the borrower or otherwise;
c. Populous or a third party acting in accordance with Populous’ instructions, must agree to:
i. receive payments in respect of interest or capital or both due under the article 36H agreement from the borrower; and
ii. make payments in respect of interest or capital or both due under the article 36H agreement to the lender;
d. for the purposes of the receipt and distribution of payments by Populous under the article 36H agreement, it is immaterial that the payments may be subject to conditions and/or that Populous or a relevant third party may be entitled to retain all or some of the payment collected from the borrower; and
e. Populous or a third party acting in accordance with Populous’ instructions, must agree to:
i. take steps to procure the payment of a debt under the article 36H agreement;
ii. exercise or enforce rights under the article 36H agreement on behalf of the lender.
(See article 36H RAO; and see PERG 2.7.7H).
17. It should be noted that Populous will also ‘operate an electronic system in relation to lending’ if the electronic Platform facilitates a person assuming the rights of the lender under an article 36H agreement by assignment or by operation of law and all of the conditions listed above at paragraph  of this advice are satisfied.
18. The following activities are also caught within the definition of ‘operating an electronic system in relation to lending’ if carried on by Populous in the course of, or in connection with the activities described above at paragraphs  and  of this advice:
a. presenting or offering article 36H agreements to a prospective borrower or prospective lender with a view to those persons becoming the lender and borrower under the article 36H agreement;
b. furnishing information relevant to the financial standing of a prospective borrower to assist a prospective lender to determine whether to provide credit to the prospective borrower under an article 36H agreement;
c. taking steps to procure the payment of a debt due under an article 36H agreement;
d. taking steps to perform duties or exercise or enforce rights under an article 36H agreement on behalf of the lender;
e. taking steps with a view to ascertaining whether a credit reference agency holds information relevant to the financial standing of a person and taking steps to ascertain the contents of such information;
f. taking steps with a view to securing the correction of, the omission of anything from, or the making of any other kind of modification of, information held about a person by a credit reference agency;
g. giving advice in relation to any of the steps listed above.
19. Subject to the discussion of the definition of ‘article 36H agreement’ below, it can be seen that the activities carried on by Populous by operating and providing the Platform fall within the operational activities described above.
20. With reference to the ‘background’ set out above in this advice, the purpose of the Platform is to facilitate the matching of invoice sellers with invoice buyers with a view to a transaction for the sale of the invoice being concluded between the parties which (subject to the discussion below regarding the nature of the agreements facilitated by the Platform) equates to the activity described in paragraph [16(a)] above.
21. I understand that Populous, as Platform administrator, will vet and credit check prospective buyers and sellers on the Platform. The Platform will then produce a credit score for the invoices offered for auction. This equates to the activity described above at paragraph [18(b)] of this advice.
22. The Platform system will determine which agreements are made available to buyers and sellers and will run the auction process which equates to the activity described in paragraph [16(b)] above.
23. Subsequently, Populous (the Platform administrator) will collect payments from the seller and distribute those payments to the buyer of the invoice. I am instructed that Populous will also chase the seller for payment and enforce rights on behalf of the buyer in the event that the seller defaults in payment. These activities equate to the activities described above in paragraphs [16(c)] and [16(e)].
24. Nevertheless, a key criterion which must be satisfied by Populous in order to operate ‘an electronic system in relation to lending’ is that the agreements facilitated by the Platform and entered into between buyer and seller must be ‘article 36H agreements’. Crucially, in my view, the agreements facilitated by the Platform and entered into between buyer and seller do not constitute ‘article 36H agreements’ for the reasons explained below.
Article 36H agreements
25. An ‘article 36H agreement’ is an agreement by which one person provides another person with credit and, at the time the agreement is entered into, either of the following conditions is satisfied, (or was satisfied at the time the agreement was entered into):
a. the lender is an individual; OR
b. the borrower is an individual; and
i. the amount of credit provided is £25,000 or less; or
ii. the agreement is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.
(See article 36H(4) RAO); and see PERG 2.7.7H(4)).
26. It is a condition of an agreement qualifying as an ‘article 36H agreement’ that Populous does not itself provide credit under the agreement, assume the rights of a lender under the agreement (whether by assignment or by operation of law) or receive credit under the relevant agreement, (articles 36H(4) and 36H(4A) RAO).
27. It is important to note that an agreement may still be an ‘article 36H agreement’ even if it is an agreement by which an individual lender provides credit to a borrower which is a company, (PERG 2.7.7H(5)). In this circumstance, the relevant credit agreement would be an article 36H agreement where all the conditions listed above at paragraphs  and  of this advice were satisfied, but the relevant agreement would not be a ‘regulated credit agreement’ for the purposes of the consumer credit regulatory regime comprised in the FSMA and in the Consumer Credit Act 1974, (the “CCA”) because the protections of the consumer credit regulatory regime do not apply to corporate entity borrowers, (see article 60B(3) RAO).
28. However, the key condition for an agreement to qualify as an ‘article 36H agreement’ is that the agreement must be one under which the lender provides the borrower with ‘credit’. ‘Credit’ for regulatory purposes includes not only a cash loan, but ‘any other form of financial accommodation’ (s.9 (1) CCA; and see article 60L RAO).
29. Authority suggests that credit involves the supply of a benefit in respect of which indebtedness is created between the contractual parties and the obligation of the paying party to pay is deferred, (Goode: Consumer Credit Law & Practice, Volume I, 24.08, 24.10 and 24.23 – 24.24).
30. A ‘cash loan’ is a straightforward concept. However, a ‘financial accommodation’ may encompass many different situations. By way of example, a financial accommodation may involve supply credit where a supplier of goods or services extends a financial accommodation to the customer by allowing the customer time to pay for the goods or services, for example via instalments, rather than demanding payment in full at the point of sale or supply, (see s.9(1) CCA and Goode: Consumer Credit Law & Practice, Volume I, 24.2 and 24.6).
31. Based on the information and factual matrix presented to me in relation to the present matter, the agreements facilitated by the Platform and entered into between buyer and seller following completion of the auction process will be agreements for the sale and purchase of an invoice.
32. I understand from my instructions and in particular, from the information conveyed by Steve Williams during our telephone conference on 27th October 2017 that:
a. the agreement facilitated by the Platform is an agreement under which the buyer will purchase the invoice from the seller and consideration in the form of the invoice purchase price, discounted from the face value of the invoice, will pass between the parties in respect of the transfer of the relevant invoice;
b. title to the relevant invoice will transfer to the buyer from the seller upon conclusion of the auction process; and
c. it is not envisaged or intended that the seller will retain any title to or beneficial interest in the invoice whereby it could be said that ownership of the invoice remained with the seller, (see Goode, Consumer Credit Law & Practice, Volume I at 45A.5 – 45A.10).
33. Accordingly, the buyer will purchase the invoice from the seller and will acquire title to the same. Strictly on the above basis, the agreement facilitated by the Platform is an agreement for the sale and purchase of a receivable and will not constitute a credit agreement, (see Goode: Consumer Credit Law & Practice, Volume I at 24.22).
34. As discussed during our telephone conference on 27th October 2017 and as referenced in the questions I posed to instructing solicitors by my email dated 24th October 2017, instructing solicitors should note that the law makes a distinction between the acquisition of a receivable (which does not constitute the provision of credit for regulatory purposes) and lending against the security of a receivable which will constitute the provision of credit, (Goode: Consumer Credit Law & Practice, Volume I at 24.22 and 24.67).
35. An agreement for the sale and purchase of a receivable will document the consideration payable by the buyer to the seller for the purchase of the receivable comprised in the relevant invoice, even if the purchase price is a discount on the invoice value. The agreement will also document the transfer of title of the invoice from the seller to the buyer upon payment of the purchase price.
36. An agreement on the terms outlined above will not be an agreement under which credit is provided because the monies payable to the seller by the buyer constitute consideration for the purchase of the relevant asset (the invoice) and such consideration is not expressed to be repayable by the seller. As noted above, the obligation to repay is an essential ingredient of the provision of credit.
37. The above scenario can be contrasted with the position where the ‘buyer’ – in reality, a lender – advances money to the seller – in reality, a borrower - on security of the invoice. This would encompass a situation where monies were advanced by the lender to the borrower with reference to the value of the relevant invoice on terms that the borrower would repay the lender when the borrower had received payment of the invoice.
38. In the meantime, the borrower would retain title to the relevant invoice, but subject to an undertaking to assign the relevant invoice in favour of the lender in the event that the seller failed to repay on the due date. Hence, it could not be said that the lender had purchased the invoice from the borrower under the relevant agreement, (see Goode, Volume I, 24.67 – 24.68).
39. An arrangement on the above terms would constitute the provision of credit for the simple reason that the seller would be obliged, at a later date, to repay the monies advanced to it against the value of the invoice. Further, there would be no acquisition and transfer of title in respect of the relevant invoice.
40. Although on the anticipated facts of the present matter, I am instructed that the seller will collect the proceeds of payment of the invoice and will remit the same to Populous for distribution by Populous to the buyer, I understand that it is intended that the seller will collect payment of the invoice as agent for the buyer. Thus, the funds collected by the seller represent the invoice payment to which the buyer is entitled following acquisition of the relevant invoice by the buyer and not a repayment of credit by the seller.
41. Therefore, based on the analysis set out above, it is vital that the agreements facilitated by the Platform and entered into between buyer and seller upon conclusion of the auction process are contracts for the sale and purchase of an invoice and do not constitute agreements for the provision of credit which would have the result of causing the agreements facilitated by the Platform to be ‘article 36H agreements’.
42. To the above end, instructing solicitors are advised to ensure that the agreements facilitated by the Platform and entered into between buyer and seller are properly constructed as sale and purchase agreements with the following contractual requirements:
a. the consideration passing between buyer and seller should be expressed to be the purchase price of the relevant invoice;
b. the difference between the purchase price of the invoice and the face value of the invoice should be expressed to be a discount and should not be structured as interest payable;
c. the seller should not be required to repay the consideration for the invoice. As noted above upon conclusion of the purchase of the invoice by the buyer, the buyer should assume the credit risk in the invoice;
d. title to the invoice should transfer from the seller to the buyer upon payment of the purchase price and the seller should not retain any legal or beneficial ownership of the invoice; and
e. the seller will collect payment of the invoice and will remit those monies to Populous for distribution to the buyer, but the seller will undertake these actions as agent for the buyer.
43. It follows that if the contractual requirements set out above are satisfied, there is no cash loan, or financial accommodation created pursuant to the transaction between buyer and seller. Accordingly, on this basis, I consider that the agreements facilitated by the Platform are not agreements under which the buyer provides ‘credit’ to the seller. Thus, the agreements facilitated by the Populous Platform fall outside the definition of ‘article 36H agreement’.
44. Therefore, in conclusion, predicated strictly on the factual basis outlined above, Populous will not carry on the regulated activity of operating an electronic system in relation to lending for the simple reason that the Platform does not facilitate the entry into ‘article 36H agreements’ by lenders and borrowers. Instead, the Platform facilitates the entry into invoice purchase agreements by buyers and sellers which do not constitute credit agreements.
45. Finally, based on the conclusion that the agreements facilitated by the Platform are not article 36H agreements, Populous will not undertake the regulated activity, pursuant to article 53(2) RAO of advising on article 36H agreements, (see further PERG 2.7.16AA).
46. Turning next to consider the issuance of Pokens by Populous and whether Pokens comprise electronic money, under article 9B RAO, issuing ‘electronic money’ by a credit institution or by a person authorised to do so under the Electronic Money Regulations 2011, (the “Electronic Money Regulations”) is regulated activity. 47. It is a criminal offence under regulation 63, Electronic Money Regulations for a person to issue electronic money if that person is not authorised to do so, (PERG 3A.2 Q.2). 48. For the purposes of the Electronic Money Regulations, ‘electronic money’ means electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which: a. is issued on receipt of funds for the purpose of making payment transactions;
b. is accepted by a person other than the electronic money issuer; and c. is not excluded by regulation 3 of the Electronic Money Regulations.
49. Guidance suggests that electronic money is a payment product for the purposes of making payment transactions. ‘Payment transactions’ are transactions initiated by payer or payee which involve the transfer, withdrawal or placing of funds, (see regulation 2(1) Payment Services Regulations 2009).
50. The value is held electronically or magnetically on a payment instrument (either locally or remotely) such as a pre-paid payment card, a PC or other device, or on a plastic card with a magnetic swipe strip. Payment transactions using the value can then be made using the payment instrument.
51. The legislative intention (see Recital (7) Electronic Money Directive, Directive 2009/110/EC) is that the definition of electronic money is technically neutral so as potentially to cover all situations where a person issues pre-paid stored value in exchange for funds. The definition expressly captures both electronically and magnetically stored value and electronic money stored on hard drives, in a cloud or in account based schemes. (See further PERG 3A.2 Q.8 and Q.9).
52. The starting point is to note that the Pokens issued by Populous potentially fall within the definition of ‘electronic money’. The Pokens clearly comprise electronically stored value. Populous will issue the Pokens to buyers upon receipt of funds from the buyer in a fiat currency. The buyer will then use the Pokens to pay for invoices purchased via the Platform.
53. Subsequently, the buyer can realise the value comprised in the Pokens by cashing them in and exchanging the Pokens back into a fiat currency, thereby making a claim for value on Populous as issuer of the Pokens.
54. On the above basis, Pokens fall within the first limb of the definition of ‘electronic money’ set out above at paragraph  of this advice. The questions arise therefore as to whether the Pokens are accepted as payment by a person other than the issuer and whether the exclusions at regulation 3, Electronic Money Regulations will apply.
55. The Pokens are accepted by the seller of invoices as payment for the relevant invoices sold via the auction process conducted on the Platform. I am instructed that the seller will be credited with the sale proceeds in Pokens and will have to convert the same to a fiat currency in order to realise value. Arguably therefore, a person other than Populous as issuer of the Pokens accepts payment in Pokens.
56. I am instructed that the Pokens are not accepted by third parties for use outside the Platform. Further, the seller must convert the Pokens into a fiat currency in order to realise the value comprised in the Pokens. The seller therefore does not unconditionally accept payment in Pokens but must realise the value in the Pokens and withdraw funds from the Platform. Hence, it may be argued that the seller does not ultimately accept payment in Pokens.
57. Significantly however, excluded from the definition of ‘electronic money’ is monetary value stored on specific payments instruments which can only be used in a limited way and which meets one of a number of specified conditions including that:
a. the monetary value will allow the holder of the value to acquire goods and services only in the issuer’s premises; and/or
b. the monetary value will allow the holder only to acquire a very limited range of goods and services,
(see Regulation 3(a) Electronic Money Regulations).
58. Even if it is correct that the Pokens are accepted as payment by the seller of the invoice and so are accepted as payment by a person other than Populous as issuer of the Pokens as discussed above at paragraphs  –  of this advice, I consider that the Pokens do not in any event fall within the definition of ‘electronic money’ because they are excluded by operation of regulation 3(a) Electronic Money Regulations.
59. I am instructed that Pokens can only be used within the Platform and are not accepted as a means of payment by any third party. FCA guidance indicates that instruments for the purposes of the exclusions outlined above can include cards, vouchers and other devices. (See PERG 15.5 Q.40 and Q.41).
60. The Poken is a virtual currency stored in a virtual wallet but crucially, it can be used only to pay for invoices purchased as a result of the auction process via the Platform. Currently, Pokens cannot be used for any other purposes. I would recommend that the terms and conditions attached to the issuance of Pokens make this limitation explicit.
61. It follows that the Pokens will fall within the ‘limited network’ exemption at article 3(a) Electronic Money regulations because the Pokens can only be ‘spent’ with Populous and can only be used to purchase invoices via the Platform auction process.
Important caveats to advice
62. Nevertheless, there are two very important caveats to the above advice.
63. First, with effect from 13th January 2018, persons relying on the ‘limited network’ exemption to exempt their electronic money issuance from the scope of the Electronic Money Regulations will be subject to new notification requirements imposed by the Payment Services Regulations 2017, (see regulation 3A, Electronic Money Regulations).
64. If, in any 12 month period, the total value of payment transactions made using Pokens issued by Populous (in reliance on the limited network exemption) exceeds Euros 1million, then Populous must notify the FCA.
65. If notification is required under regulation 3A, Electronic Money Regulations, Populous must provide the FCA with details and descriptions of the transactions made using the Pokens and must specify the basis on which Populous considers that the limited network exemption applies to its activities. I anticipate that the FCA will specify the method by which any such notification should be made, (see prospective article 3A Electronic Money Regulations).
66. Following any notification required under article 3A Electronic Money Regulations, the FCA will then determine whether or not the Pokens continue to fall within the limited network exemption. If the FCA determined that the limited network exclusion no longer applied to Pokens, Populous would be able to appeal any FCA decision in this regard to the Upper Tribunal, (see article 3A(6) Electronic Money Regulations).
67. The second important caveat to my advice is that I understand from our telephone conference on 27th October 2017, that Populous aspires to make arrangements with third party merchants and retailers for the acceptance of Pokens as a means of payment.
68. For the reasons discussed above, instructing solicitors should note that any such third party arrangements will compromise the ability of Populous to rely on the limited network exemption such that the Pokens would fall within the definition of electronic money. The result would be that Populous would carry on the regulated activity of issuing electronic money for which it would need to authorised by the FCA, (article 9A RAO). It follows that early advice should be sought in the event that any such arrangements are contemplated.
69. In summary therefore, presently the issuance by Populous of Pokens falls outside the definition of ‘electronic money’ by operation of regulation 3(a) Electronic Money Regulations. It follows that by issuing Pokens for use within the Platform Populous will not carry on the regulated activity of issuing electronic money. However, instructing solicitors and Populous should note the two important caveats to my advice set out above.
Other regulated activity
70. Additionally, I considered whether Populous, by establishing and operating the Platform, could be construed as undertaking the regulated activity of arranging (bringing about) deals in investments, (article 25(1) RAO) or alternatively, the distinct regulated activity of making arrangements with a view to transactions in investments, (article 25(2) RAO).
71. The regulated activity of arranging essentially refers to the activity of making arrangements for a third party to buy, sell, subscribe for or underwrite a particular investment, (article 25(1) RAO). The relevant arrangements must directly bring about a concluded transaction in investments, (PERG 2.7.7B).
72. The regulated activity of making arrangements with a view to transactions in investments is cast more widely and it is not necessary that the ultimate parties to the transaction participate in the relevant arrangements, (see article 25(2) RAO; and see PERG 2.7.7BA – 2.7.7BF).
73. Significantly however, the regulated activities of arranging and making arrangements referred to above relate only to certain categories of investment including securities, structured deposits and ‘relevant investments’, (article 25(1) RAO). ‘Relevant investments’ include amongst other things, shares, warrants, debentures, rights under contracts of insurance, Government and public securities and ‘instruments creating or acknowledging indebtedness’.
74. By establishing and operating the Platform Populous will be making arrangements for persons to buy and sell invoices relating to debts owed by customers to companies. The underlying transaction facilitated by the arrangements made by Populous and brought about by the Platform is for the sale and purchase of invoices. Therefore, the relevant question is whether the invoices constitute investments for the purposes of article 25 RAO.
75. I have assumed for the purposes of this advice that in every case, the invoices offered for sale on the Platform will be invoices issued by companies in respect of the supply of goods and services to a customer of the relevant company.
76. On the above basis, the invoices do not fall within the categories of investment covered by article 25(1) or 25(2) RAO.
77. As a point to note, it is possible that commercial invoices of the type offered for sale via the Platform might have been caught within the definition of ‘instruments creating or acknowledging indebtedness’ at article 77 RAO. The definition of an ‘instrument creating or acknowledging indebtedness’ is widely cast and includes a catch all relating to ‘any other instrument creating or acknowledging indebtedness’, (article 77(1)(f) RAO).
78. Upon issuance, an invoice operates to create a debt payable by the addressee to the issuer of the invoice in respect of the subject matter of the relevant invoice. As such, an invoice potentially falls within the catch all ‘any other instrument creating or acknowledging indebtedness’.
79. However, an instrument acknowledging or creating indebtedness for the consideration payable under a contract for the supply of goods or services is expressly carved out from the definition of ‘instrument creating or acknowledging indebtedness, (article 77(2)(a) RAO). In other words, an invoice creating indebtedness in respect of the price payable for the supply of goods and services does not constitute an instrument creating or acknowledging indebtedness for the purposes of article 77 RAO.
80. Therefore, whilst the actual facilitation and arranging activity undertaken by Populous by establishing and running the Platform does amount to the activity of ‘making arrangements’ for the purposes of article 25 RAO, the transactions arranged by Populous do not relate to relevant investments or securities for the purposes of article 25 RAO. Hence, on the basis discussed above, Populous will not undertaking any regulated arranging activity under article 25(1) or 25(2) RAO.
81. Nevertheless, I would strongly caution that it should be a condition of acceptance of invoices for auction via the Platform that the invoices relate to the consideration payable for the supply of goods and services to customers by the corporate issuer of the invoice.
82. Pursuant to s. 21(1) FSMA, a person must not in the course of business communicate an invitation or an inducement to engage in investment activity unless that person is an authorised person or unless the content of the communication has been approved by an authorised person, (s.21(2) FSMA). This statutory provision is referred to as the restriction on financial promotion.
83. Very briefly, the Populous website and the Platform itself, together with any marketing materials or other communications promoting the Platform or the website, are all capable of constituting financial promotions for the purposes of the FSMA. In addition to the restriction on who may communicate or approve a financial promotion, the content of a financial promotion is controlled and the classes of person to whom certain financial promotions may be directed is also controlled pursuant to the FSMA.
84. In order to constitute a financial promotion and for the restriction on financial promotion to apply, a promotion must be an invitation or an inducement to ‘engage in investment activity’.
85. ‘Investment activity’ refers to the following:
a. entering or offering to enter into an agreement the making or performance of which by either party would be ‘controlled activity’; and/or
b. exercising any rights conferred by a ‘controlled investment’ to buy, sell, underwrite, or convert a ‘controlled investment’,
(s.21(8) FSMA; and see PERG 8.7.1).
86. It follows that the question arises as to whether the activities and agreements promoted via the website and the Platform relate to controlled investments and/or controlled activity and thus amount to ‘investment activity’ for the purposes of the restriction on financial promotion.
87. The relevant ‘controlled activities’ and ‘controlled investments’ are set out at Schedule 1, Financial Services & Markets Act 2000 (Financial Promotion) Order 2005, (the “Financial Promotion Order”). Instructing solicitors will note that whilst the relevant categories and definitions of ‘controlled activities’ and ‘controlled investments’ track closely the definitions of ‘specified investment’ and ‘specified activity’ as set out in the RAO, there are some differences (none of which are material to the present matter).
88. As discussed above at paragraph  of this advice, by operating the Platform Populous will be making arrangements for persons to buy and sell invoices relating to debts owed by customers to companies. The underlying transaction facilitated by the arrangements made by Populous and brought about by the Platform is for the sale and purchase of invoices.
89. With reference to Schedule 1, Financial Promotion Order, the sale and purchase of commercial invoices does not amount to a controlled activity and does not relate to a controlled investment. Accordingly, the financial promotions regime will not apply to the Platform.
90. I would repeat however my advice set out above at paragraphs  –  regarding the potential for invoices which do not relate to consideration payable for the supply of goods and services to constitute ‘instruments creating indebtedness’ (which are controlled investments to which the financial promotions regime would apply).
Important caveat to financial promotion advice
91. Although for the reasons discussed above I have advised that the financial promotions regime does not apply to the Populous website and the Platform, nevertheless, I would caution strongly that Populous may wish to think about the category and status of potential invoice buyers who can access and purchase invoices via the Platform and to whom the Platform is promoted.
92. Based on my understanding of the operation of the Platform set out in the ‘background section’ above, a buyer of invoices will acquire title to the invoice and assume credit risk in the invoice in the event that the invoice goes unpaid.
93. It follows that the buyer’s capital commitment comprised in the purchase price of the invoice is at risk and a buyer may lose all or part of their investment. Further, the protections of the Financial Services Compensation Scheme, (“FSCS”) will not apply to buyers on the Platform. These facts need very clearly and prominently to be communicated to applicants and prospective buyers in the Platform terms and conditions, on the face of the Populous website and Platform itself and in any marketing and promotional materials. (I should be pleased to advise in more detail on this issue if requested to do so).
94. Instructing solicitors will note that the regulatory regime applicable to crowdfunding and P2P platforms is currently subject to FCA scrutiny and I anticipate that the FCA will soon announce some amendments to the applicable regulatory regime.
95. In particular, the FCA is concerned that investors do not appreciate the risks involved with crowdfunding and P2P platforms. The FCA is concerned that investors do not appreciate that their monies are effectively locked into products and that there is not a ready market for the shares, warrants and investments offered by investment based crowdfunding sites. These products are referred to as ‘non readily realisable securities’ and the promotion of ‘non readily realisable securities’ is strictly limited to certified high net worth individuals or sophisticated investors.
96. Based on my understanding of the background set out above, it is not clear to me the extent to which a buyer of an invoice could (if at all possible) withdraw their money from the Platform prior to maturity and payment of the relevant invoice. By analogy with the position flowing from investment based crowdfunding platforms, it is possible that the buyer’s money is ‘locked in’ until the invoice is paid or declared delinquent. This is again a significant risk which must be explained to prospective buyers.
97. I understand from my instructions that buyers via the Platform may be individual natural persons.
98. Given the credit risk to which buyers will be exposed, the lack of protection from the FSCS and the possibility that a buyer’s funds will be ‘locked in’, Populous may wish to consider whether to restrict buyers on the Platform only to persons who qualify as certified high net worth individuals or sophisticated investors, (as those terms are defined at articles 49-50A Financial Promotion Order).
99. By restricting access to the Platform only to these classes of buyer, Populous will mitigate the risk that a buyer did not understand the nature of the transaction to which they have committed via the Platform and will also mitigate any accusation from the regulator that the Platform was promoted to or directed at an inappropriate class of investor.
100. I would reiterate that it is clear that by establishing and operating the Platform, Populous will not undertake the regulated activity of operating an electronic system in relation to lending. Further, generally speaking P2P invoice finance platforms are outside the scope of regulation pursuant to the RAO.
101. Nevertheless, I note that a competitor organisation to Populous, MarketInvoice, has treated its ‘investor guide’ as a financial promotion and has restricted the promotion of the MarketInvoice product to certified high net worth individuals and sophisticated investors.
102. For the reasons discussed above in the ‘Financial Promotion’ section of this advice, I consider that the restriction on financial promotion does not apply to the Platform and it is not immediately clear to me why MarketInvoice has elected to treat its investor guide as a financial promotion whilst acknowledging that its P2P invoice financing platform is not subject to regulation by the FCA.
103. However, I would conclude by suggesting that financial promotion, and in particular the eligibility of buyers to transact via the Populous Platform and the promotion of the Platform to those buyers, is a topic which should be kept under close review.
FCA review of crowdfunding and P2P platforms
104. As noted above, the crowdfunding sector and P2P platforms are subject to current regulatory scrutiny.
105. By a Call for Input dated July 2016, the FCA noted that the growth of the crowdfunding and P2P sector meant that lines between crowdfunding, P2P lending and other business models were becoming blurred. The FCA noted a risk of regulatory arbitrage under which P2P and crowdfunding platforms may conduct business similar to asset management but under a regulatory regime which was not designed for it.
106. In particular, with reference to P2P lending, the FCA alighted on the use of ‘provision funds’ whereby a lender’s micro investment in a loan is subject to a small deduction which is then credited to a shared provision fund. The shared provision fund is allotted to all loans across the portfolio and not just the particular loan in respect of which the lender has elected to lend.
107. In the event of borrower default, the shared provision fund is drawn upon and thus the lender is exposed to the credit default risk across the whole portfolio and not just against the credit risk comprised in the particular loan in respect of which they have advanced funds. In the view of the FCA, the use of shared provision funds can approach a structure similar to a collective investment scheme.
108. Whilst there is a particular statutory exemption which means that a person operating an electronic system in relation to lending will not also operate a collective investment scheme, of course, for the reasons discussed above, Populous is not undertaking the regulated activity of operating an electronic system in relation to lending and thus, would not be able to rely on the carve out for operating a collective investment scheme. Instructing solicitors are requested to contact me if it eventuates that Populous establishes a shared provision fund in connection with the Platform.
109. In the light of the above commentary, it is sensible to anticipate further regulation from the FCA in relation to P2P platforms and crowdfunding and again, this is a topic which will require careful monitoring.
110. Under article 39F(1) RAO, it is regulated activity to take steps to procure payment of a debt due under a credit agreement, a consumer hire agreement or under an article 36H agreement, (see further, PERG 2.7.8D). Article 39F RAO refers to the regulated activity of debt collection.
111. It is important to note that the regulated activity of debt collection encompasses the collection of debts arising under ‘credit agreements’ and article 36H agreements within the above definition. In order to carry on the regulated activity of debt collection, it is not the case that the credit agreements in respect of which debts are collected are regulated credit agreements, just that they are credit agreements within the definition set out at article 60B(3) RAO, (see article 39F(1) RAO; and see article 60B(3) RAO).
112. The starting point is that simply collecting debts where the collector is the original contractual party to whom the debt is owed does not constitute regulated debt collection for the purposes of article 39F RAO, (see 39H RAO; and see Goode: Consumer Credit Law & Practice, Volume I, 48.42 – 48.42A).
113. Nevertheless, I am instructed that Populous will take steps to procure payment from the seller of the monies collected by the seller under invoices auctioned by the seller on the Platform. I understand that Populous (as Platform administrator) will perform this function as agent for the buyer – the buyer being the contractual party to whom the debt is owed following the acquisition by the buyer of the relevant invoice pursuant to the auction process.
114. As discussed above, I have assumed that pursuant to the agreement entered into between buyer and seller of a relevant invoice upon conclusion of the auction process, the seller will agree to remit monies to Populous upon collection by the seller of payment of the invoice. Populous will then distribute those monies to the relevant buyer. It follows that the seller will owe a contractual duty to the buyer to remit those monies to Populous for distribution to the buyer.
115. It follows that the debt collected by Populous as agent for the buyer will arise under the contractual agreement for sale of the invoice. For the reasons discussed above at paragraphs  to  of this advice, the agreement for sale of the invoice does not comprise a credit agreement or an article 36H agreement on the basis that the agreement is a sale and purchase agreement and no credit is provided pursuant to that agreement.
116. Accordingly, on the basis that the regulated activity of debt collecting under article 36F RAO relates to the collection of debts under credit agreements and/or article 36H agreements, by seeking to collect payment from the seller under the sale agreement for the relevant invoice, Populous will not undertake regulated debt collection.
117. Further, although for the purposes of article 39F RAO, ‘credit agreement’ is widely defined to capture both regulated and non regulated credit agreements under the RAO, (see article 60B(3) RAO) a credit agreement is defined to refer to an agreement pursuant to which a lender makes available credit of any amount to a borrower who is an individual natural person or a ‘relevant recipient of credit’ (as that term is defined at article 60L RAO).
118. On the basis that I am instructed that sellers permitted to register with the Platform and submit invoices for auctions will always be corporate entities and so the entity from which Populous will seek to collect the debt will be a corporate entity, a ‘credit agreement’ as defined for the purposes of article 39F RAO will not arise in any event.
119. However, in circumstances where the seller failed or was otherwise unable to collect payment under the relevant invoice, it is not clear to me whether Populous would then seek directly to take steps to collect payment from the addressee of the relevant invoice and effectively, cut out the seller from the collection process.
120. In the circumstance contemplated in the paragraph above, it is arguable that by stepping into the shoes of the seller directly to procure payment from the addressee of the invoice, Populous would risk undertaking regulated debt collection if the relevant invoice (and thus the debt due from the addressee) related to a debt arising under a credit agreement, a consumer hire agreement or an article 36H agreement.
121. It should be noted that if an invoice auctioned on the Platform does relate to a credit agreement, a consumer hire agreement or an article 36H agreement (as defined) such a scenario would cause regulatory issues for both Populous and for the buyer of the invoice.
122. On the basis that the buyer of the invoice will acquire title to the invoice arising in connection with a credit agreement, a consumer hire agreement or with an article 36H agreement, then the buyer would step into the shoes of the seller – being the original creditor – and would assume regulatory responsibility for the compliant administration and exercise of rights in relation to the debt arising pursuant to the invoice. In summary, potentially this would involve the buyer undertaking the regulated activities of exercising and enforcing the rights of a lender under a regulated credit agreement and regulated debt collection, (see further, Goode: Consumer Credit Law & Practice, Volume I at 45A.5).
123. Accordingly, I would very strongly recommend that it is a condition of invoice acceptance for the Platform that the invoices auctioned by sellers must not relate to debts arising under any agreement which is a credit agreement, a regulated credit agreement, a consumer hire agreement or an article 36H agreement.
124. As a distinct category from the regulated activity of debt collecting, pursuant to article 39G RAO, it is regulated activity on behalf of a lender to perform duties on behalf of a lender under a credit agreement, a consumer hire agreement or under an article 36H agreement, and/or to exercise and enforce rights under a credit agreement, a consumer hire agreement or under an article 36H agreement on behalf of a lender, (article 39G(1) and 39G(2) RAO; and see PERG 2.7.8E).
125. The commentary set out above at paragraphs  to  of this advice relating to regulated debt collection applies equally to the regulated activity of debt administration.
126. Accordingly, I would again strongly recommend, for precisely the same reasons, that in order to avoid any risk that Populous might undertake the regulated activity of debt administration, it is a condition of invoice acceptance for the Platform that the invoices auctioned by sellers must not relate to debts arising under any agreement which is a credit agreement, a regulated credit agreement, a consumer hire agreement or an article 36H agreement.
127. In the course of establishing and administering the Platform, Populous will act as a data controller for the purposes of the Data Protection Act 1998, (the “DPA”) on the basis that it will collect, use, process and store information and data from which individual natural persons can be identified and Populous will determine the uses for which such data is processed. Such data comprises personal data for the purposes of the DPA, (s.1 and s.5(1) DPA).
128. The personal data collected and used by Populous will include information about its own officers and employees and information about the individual buyers and the directors and officers and employees of the corporate entity sellers who register to use the Platform.
129. As I advised during our telephone conference on 27th October 2017, the immediate consequence of Populous being a data controller is that it will have to register or ‘notify’ with the office of the Information Commissioner, (the “ICO”). This process is relatively straightforward and can be completed online. Notifications must be renewed and updated on an annual basis.
130. Further, Populous will be required to process personal data in accordance with the seven data protection principles contained within the DPA. Populous must ensure that its data protection policies and procedures are compliant with the requirements of the DPA, (s.5(1) DPA).
131. In particular the Populous Platform terms should include a compliant notification to customers (usually headed something like ‘Use of Your Personal Data’) informing the customer, amongst other things, of the types of personal data collected by Populous, the reasons for which such data is collected and processed and the persons with whom such data is shared and for what reason. The notice should be compliant with the requirements of the DPA.
132. I should be pleased to advise in more detail on data protection issues if required to do so.
The General Data Protection Regulation
133. Instructing solicitors should note that the DPA will be replaced by the General Data Protection Regulation (the “GDPR”) which comes into force on 25th May 2018. The GDPR will have direct effect in the UK on this date and no further legislation is required to implement the same. Implementation of the GDPR is unaffected by Brexit.
134. The GDPR will introduce significant changes to the UK data protection regulatory regime currently comprised in the DPA including:
a. a new, wider definition of personal data;
b. enhanced rights and protections for data subjects;
c. new responsibilities for data controllers (such as Populous) and data processors;
d. additional reporting and record keeping requirements for data controllers; and
e. greater regulatory sanction for breach of the data protection regulatory regime.
135. Under article 5, GDPR, personal data must be processed lawfully and in a transparent manner. Personal data must be collected for specified, explicit and transparent purposes.
136. I would advise that as part of ensuring its data protection compliance, Populous should evaluate and check its actual practice in relation to what personal data is collected from employees, officers and customers; the purposes for which data is collected; how and by whom the data is processed; with whom data is shared; for what purpose data might be shared; where personal data might be transferred or processed abroad; and for how long such personal data may be retained.
137. I would advise that in view of the forthcoming implementation of the GDPR it is vital to ensure that the required written data protection notification to customers contained in the Platform terms and conditions on how data is used and processed is accurate when measured against actual practice.
138. In addition, the GDPR introduces several new requirements which are not present in the current data protection regime under the DPA and which will need to be addressed in written data protection notification to customers contained in the Platform terms and conditions, specifically:
a. Populous must specify the ‘lawful basis’ on which a customer’s personal data is to be processed;
b. the ‘lawful bases’ are listed at article 6, GDPR;
c. in the case of Populous, the applicable bases will likely include that the customer has given their consent to the processing; that the processing is necessary for the performance of the contract for the provision of Platform services; and that the processing is necessary for compliance with a legal obligation (credit checking, anti money laundering procedures, etc) to which Populous is subject;
d. Populous must specify the periods for which personal data is retained by Populous; and
e. Populous must explain the right of the data subject to complain to Populous (and the Information Commissioner) in the event of a complaint about data processing and the procedures for complaints handling.
139. I should be pleased to advise in more detail on the GDPR and, if required to do so, to assist with the necessary drafting once Populous has determined how it wishes to proceed.
140. I trust that the contents of this advice are clear. Instructing solicitors should not hesitate to contact me in Chambers should any additional questions arise.
10th November 2017