If you haven’t had to submit a change of corporate control application before and you haven’t been involved in an original operating licence application, you might not be familiar with the Gambling Commission’s requirements, or perhaps its lack of clear requirements, in respect of source of funds evidence.
‘Source of funds evidence’ in this context really means the documentation and information required by the Gambling Commission to verify the origin and legality of the funds used to fund either the acquisition of shares or voting power that has triggered a CoCC, or a new licence applicant, as well as any ongoing investment. Ultimately, the Gambling Commission needs to be satisfied that those funds are derived from legitimate sources and are not the proceeds of crime.
Until recently, when submitting an operating licence application or a CoCC application, licensees had been asked to submit ‘evidence of proof of funding’, but the Commission hadn’t published much more detail as to who should be providing that evidence, or what they should provide. As a result, applicants generally had to anticipate what source of funds evidence the Commission might require, and persuade their investors to disclose that (often highly confidential) evidence, without being able to point them to any formal prescriptive guidance that justified their requests.
Consequently, applications often missed the mark on the detailed source of funds evidence the Commission needed, leading to requests for additional information once the Commission had completed its initial review. This pattern not only delayed application processing, but also left some CoCC applicants in a bind where investors had already provided funding as part of a CoCC. Those investors were left with a stark choice: provide the requested evidence, or face potential refusal of the CoCC application and revocation of the operating licence.
The new proof of funding guidance aims to provide some clarity at an earlier stage in the process on who should be providing source of funds evidence and what evidence they should provide. In this article, we consider what the new guidance says, and what it means in practice for licensees. We have also included some worked examples based on our interpretation of the guidance – although, as we set out below, these examples are intended as an indicative guide only based on our interpretation of the guidance, and a thorough analysis of the specific funding circumstances of any change of corporate control or operating licence application should always be carried out before the application is submitted.
We regularly advise on changes of corporate control, operating licence applications, and general source of funds issues. If you need any assistance in understanding the Commission’s requirements or have questions about the information that would need to be disclosed in a specific scenario, please don’t hesitate to get in touch.
WHO NEEDS TO PROVIDE SOURCE OF FUNDS EVIDENCE AND WHAT SHOULD THEY PROVIDE?
The Commission is clear that the source of funds guidance is intended to offer a ‘general overview’ of what source of funds evidence is required, and that it will assess each application on a case-by-case basis according to risk. As such, whilst the guidance provides a framework for when it will require source of funds evidence, what evidence is actually required isn’t as clear.
The new guidance generally makes a distinction between regulated and unregulated investors who invest directly in the applicant, and regulated banks or investment companies acting as intermediaries for underlying investors (for example, hedge funds investing on behalf of their clients). Given their regulated status, regulated investors carry a lower risk and generally will not be required to disclose detailed source of funds information unless they are contributing a significant proportion of the overall investment to the licensee or applicant.
Conversely, unregulated, newly established and individual investors, even those who invest through a regulated intermediary, will generally be required to evidence their source of funds, given they are perceived to be a higher risk by the Commission.
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Direct investors
Those who are investing directly in the licensee, rather than through a third-party intermediary such as an investment fund.
(a) Unregulated entities or individuals:
- Individuals contributing £50,000 or more (or foreign currency equivalent).
- Evidence to be provided: This will depend on the investor’s source of funds, but is likely to include bank statements, investment portfolio statements and P60s.
- Entities over 12 months old at investment date, investing £1 million or more.
- Evidence to be provided: The latest set of filed financial statements should be sufficient.
- Entities less than 12 months old at investment date, regardless of investment amount.
- Evidence to be provided: “Evidence of how the entity has been funded”. For example, has it received a loan from a group company? If so, the loan document and bank statements documenting the flow of funds from one company to the other should be provided. In this scenario, the Commission may subsequently require further source of funds evidence from the loaning entity for the loan amount.
(b) Regulated banks or investment companies:
- Require source of funds evidence for investments constituting 10% or more of the total amount, along with the entity’s FCA reference number (or equivalent).
- Evidence to be provided: If over 12 months old, provide the latest set of filed financial statements. If not, consider how the entity has been funded.
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Underlying investors who invest through a FCA regulated intermediary
Underlying investors invest in the applicant or licensee via an intermediary that is regulated by the FCA in the UK.
(a) Unregulated entities or individuals:
- Individuals contributing £50,000 or more (or foreign currency equivalent).
- Evidence to be provided: This will depend on the investor’s source of funds, but is likely to include bank statements, investment portfolio statements and P60s.
- Entities over 12 months old at investment date, investing £1 million or more.
- Evidence to be provided: The latest set of filed financial statements should be sufficient.
- Entities less than 12 months old at investment date, regardless of investment amount.
- Evidence to be provided: “Evidence of how the entity has been funded”.
(b) Regulated entities
- Those investing 5% or more of the overall total investment amount.
- Evidence to be provided: If over 12 months old, provide the latest set of filed financial statements. If not, consider how the entity has been funded.
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Underlying investors who invest through an overseas regulated intermediary
The underlying investors whose funds are invested through an intermediary that is regulated by a foreign authority equivalent to the FCA.
(a) Unregulated entities or individuals:
- Individuals contributing £50,000 or more (or foreign currency equivalent).
- This will depend on the investor’s source of funds, but is likely to include bank statements, investment portfolio statements and P60s.
- Entities over 12 months old at investment date, investing £1 million or more.
- Evidence to be provided: The latest set of filed financial statements should be sufficient.
- Entities less than 12 months old at investment date, regardless of investment amount.
- Evidence to be provided: “Evidence of how the entity has been funded”.
(b) Regulated entities
- Those investing 5% or more of the overall total investment amount.
- Evidence to be provided: If over 12 months old, provide the latest set of filed financial statements. If not, consider how the entity has been funded.
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FCA regulated entities acting as an intermediary
Entities that are regulated by the FCA and pool funds from underlying investors to invest in the licensee.
- FCA regulated entities must provide their FCA reference number and, if investing 10% or more of the total investment amount, a schedule of the underlying investors.
- Evidence to be provided: FCA reference number, schedule of investors, and if over 12 months old, the latest set of filed financial statements. If not, consider how the entity has been funded.
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Overseas equivalent regulated entities acting as an intermediary
Similar to their FCA-regulated counterparts but located outside the UK, these entities are regulated by authorities equivalent to the FCA.
- Overseas equivalent regulated entities must provide their reference number with the relevant regulator and, if investing 5% or more of the total investment amount, a schedule of the underlying investors.
- Evidence to be provided: regulator reference number, schedule of investors, and if over 12 months old, the latest set of filed financial statements. If not, consider how the entity has been funded.
When considering which entities and individuals will need to evidence their source of funding in the context of the operating licence application or CoCC, as a starting point, we would suggest considering the following questions:
- What is the nature of the investment? (Is it direct investment or via an intermediary?)
- Is the funding coming from an individual, an unregulated entity, a regulated bank, or an investment company?
- What is the amount being provided by that individual or entity compared to the overall investment amount? (This determines the threshold for the required source of funds evidence and, if funds are being provided via an intermediary, whether a schedule of investors needs to be provided.)
- When were any entities providing funding established? Where entities are less than 12 months old at the time of investment, more detailed source of funding evidence will be required.
- Where funds are provided through an intermediary, who are the underlying investors and does any of their contributions, or the fact that they are newly established entities, trigger the need for detailed source of funds evidence to be provided?
We have used this structure in the worked examples below, which are based on our interpretations of the source of funds guidance only, which as we have explained above, is not prescriptive. How closely the Commission will follow its new guidance remains to be seen and tested!
WORKED EXAMPLES
Worked Example 1: Direct investment by an individual
Scenario: Sarah plans to invest £100,000 directly into licensed gambling operator, Lucky Win Ltd, in exchange for an 11% shareholding, triggering a change of corporate control. She is funding her investment using profits generated by her company, Tech Innovations Ltd, which was incorporated in 2020.
Analysis: Sarah’s investment is greater than the £50,000 threshold that requires source of funds evidence.
Evidence required:
- Explanation of source of funds: A detailed account explaining how the funds were accumulated, explaining that her source of funds is the profits of “Tech Innovations Ltd”, and the activities carried on by Tech Innovations Ltd.
- Bank statements: To illustrate the accumulation of £100,000 in her account from the profits of Tech Innovations Ltd and the subsequent withdrawal or transfer of these funds to “Lucky Win Ltd.” This helps establish a clear trace of the funds from Sarah’s account to the gambling operator.
- Business financial accounts: Since the investment is funded through her company’s profits, filed financial statements for Tech Innovations Ltd that show the generation of these profits.
Worked Example 2: FCA regulated entity acting as an intermediary
Scenario: InvestCo, an FCA-regulated investment company incorporated in 2004, pools funds totalling £2 million from various investors to invest in Virtual Victory Ltd, which is applying for an operating licence from the Commission. Virtual Victory Ltd receives £15m in total funding from investors, including InvestCo.
Analysis: InvestCo’s pooled investment represents approximately 13.3% of the total funds received by Virtual Victory Ltd, surpassing the 10% threshold. Among the investors, Investor A contributes £750,000 to the pooled funds. This contribution meets the threshold for detailed source of funds evidence since he has contributed more than £50,000. No other investor contributes enough to individually meet the threshold.
Evidence required:
- FCA reference number for InvestCo: To verify its regulated status in the UK.
- Financial statements: Filed financial statements for InvestCo as an established entity.
- Schedule of underlying investors: Required as the funds invested surpass the 10% investment threshold. Based on our experience, an anonymised schedule should be acceptable to the Commission, but this should be confirmed with the Commission prior to submitting the information. As Investor A meets the £50,000 threshold, he will need to provide detailed source of funding evidence.
For Investor A (contributing £750,000)
- Source of funds explanation: A detailed account of how Investor A acquired the funds (e.g., earnings, sale of property, inheritance), including any relevant financial documentation to support the explanation.
- Bank statements: To demonstrate the source of the £750,000, including the transaction to InvestCo for the investment in Virtual Victory Ltd.
Worked Example 3: Investment through an overseas regulated intermediary
Scenario: OceanView Capital, a hedge fund regulated by the Australian Securities and Investments Commission (“ASIC”) and based in Sydney, Australia, decides to invest £5 million into Lucky Win Ltd. The investment is part of a larger fundraising effort by Lucky Win Ltd, which aims to raise £25 million in new capital for expansion by issuing new shares. OceanView Capital contributes the largest single investment in the raise, and pools this investment from a group of 200 investors, with the largest single investment from one investor being £30,000. In exchange for its investment, OceanView Capital acquires a 11% shareholding in Lucky Win Ltd, triggering a CoCC.
Analysis: OceanView Capital’s £5 million investment represents 20% of Lucky Win Ltd’s total new capital target, necessitating detailed source of funds evidence from OceanView Capital. However:
- No individual private investor contributes £50,000 or more. The largest single contribution from an individual investor is £30,000, below the threshold that would require detailed source of funds evidence for an individual investor.
- There are no established non-regulated entities that have individually invested £1,000,000 or more.
- There are no newly established (in the last 12 months) entities whose funds were used in the investment.
- No single underlying investment by a regulated entity represents 5% or more of the overall total investment amount (£25 million).
As such, none of the underlying investors need to provide source of funds evidence in relation to their investment.
Evidence Required:
- ASIC regulatory reference number for OceanView Capital: Verifying its regulated status in Australia.
- Financial statements: Demonstrating OceanView Capital’s financial health and the source of its investment capacity.
- Proof of funds transfer: Bank statements documenting the transfer of £5 million in exchange for shares in Lucky Win Ltd.
- Schedule of underlying investors: Required as the funds invested surpass the 5% investment threshold for an overseas regulated entity. Based on our experience, an anonymised schedule should be acceptable to the Commission, but this should be confirmed with the Commission prior to submitting the information.
SUMMARY
Given the guidance has been added to the Commission’s change of corporate control and operating licence application pages, and has not yet been published as standalone formal guidance, it remains to be seen whether the Commission will apply it in situations where licensees receive significant funding that does not trigger a change of corporate control, such as some capital raises. It will also be interesting to see how closely the Commission follows this guidance when required to apply it on a case-by-case basis.
Our commentary in this article aims to provide a preliminary understanding of what might be required, but the reality is that the Commission’s requests are likely to vary depending on the specifics of each case and the Commission’s perception of the risks posed by those involved. Applicants should be prepared for this and approach source of funds issues in the knowledge that whilst the goalposts are now somewhat clearer, they can, and may, be moved.
