Eternity Law International News EMI license for sale: core aspects to consider before the purchase

EMI license for sale: core aspects to consider before the purchase

April 21, 2022

Buying an E-Money Institution that is duly authorized but has not operated is a popular inquiry among the individuals that are willing to operate in a financial market. However, there are a lot of pitfalls in getting relevant information when it comes to acquiring or selling an authorized company. In this article, we will provide a list of important check-points associated with the acquisition of an EMI license for sale that will help market players to avoid costly mistakes.

EMI license for sale: time considerations

Most often, a purchaser of an AEMI is driven by the speed of the buying process. There is an illusion that acquiring an already existing and licensed institution ensures a shorter timeframe for the market entry and hassle-free start of operations compared with applying for necessary approvals from scratch. Such suppositions are erroneous, as each purchaser should firstly perform a robust audit of the regulatory compliance of a company, then make sure all appropriate documents for the deal are well-prepared and provide an appeal for the change of ownership to best communicate with regulatory authorities. The full change of ownership process normally lasts the same period as a new authorization process from its beginning to the end and is usually finished in 6 months.

Another false supposition is that an investment in an AEMI offers a shorter period for the launch of the purchaser’s products and services. It would include risks for the purchaser and must be checked by the regulatory body if new offerings are introduced to clients prior to the confirmation of the change of ownership appeal.

Let’s take a look at the legislation regulating EMIs. Under UK law, a firm with an EMI license must inform the FCA if any changes occurred. Also, EMIs fall under the Principle for Businesses (PRIN) which requires these institutions to apprise the FCA of each important matter that the regulatory body would expect to be informed about.

The launch of any product or service entails a consideration of the risk management approach to guarantee the coverage of all the facets of the purchaser’s offerings. In some cases, it would not be possible, since the infrastructure of the acquired firm is not suitable for such products, or the ultimate consumer agreement must be duly amended and contingent on regulations, such change necessitate a 60-day notification to the ultimate consumer. Also, the introduction of new services may not be completed if the firm has no appropriate approvals. To be eligible to offer new services or products, the firm would need to communicate with the regulatory body about it and receive permission before the rollout of these services.

Regulatory aspects and approval procedure

A purchaser of an EMI for sale needs to be aware of the regulative rules as to the deal which we will consider below:

The purchaser is not allowed to be in charge of the top-level employees of the company unless the change of ownership permission is issued and the executive management appointed by the purchaser is verified as working with the firm. Normally, the purchaser is applying for this approval simultaneously with the provision of a change of ownership appeal. The new owner of the firm is required to prepare a new operational model. Provision of the documents under which the firm was authorized is not the correct step. Since a new client service may be rolled out, a new risk management program must be completed. The change of ownership is deemed by the regulatory bodies to be equal to the new authorization, so be mindful that if the institution is already authorized, the transfer of ownership will not be hassle-free, likely it won’t be.

Due diligence (DD) and conforming to the law

You should understand that agreeing on the legally binding contract outlining the agreed-upon terms of the purchaser and seller of business (SPA) and closing it without effective DD could be highly risky. That’s why even if you are considering a company without active business operations or significant assets, please take into account performing efficient DD, focusing on the following:

  • Generally, any European regulator expects an AEMI to start operation within 12 months from the date of authorization. If a target firm has not initiated its operation within this period, the authorization can be eliminated. Hence, you are taking risks when purchasing a firm that is older than one year and has not performed any client activity within that timeframe.
  • To make sure all documents of the company are valid and appropriate, check up on all reports, unused commitments, letters of credit, and derivatives, the accurateness of the data especially those referring to non-material assets, such as intellectual property, trademarks, and other possession that does not form eligible funds for the regulatory rules.
  • Pay attention to all relationships between the firm and the regulators, and other competent bodies, such as financial crime investigators, etc. Sometimes unresolved issues can harm the firm and its new owners.
  • Ask for a warranty from the top-level employees and owners that there are no contracts with 3rd-party distributors entered and hidden from the regulators and purchasers, as these may lead to a range of challenges or even reputational risks. Process all negotiations with the 3rd parties, as they usually set high fees, and termination may be impossible or there may be a fine for early termination. It often may cover the full price of the contract for the period last.
  • If the company has already been in operation, analyze its AML-TF programs and check whether there are any risks to the business. Breach of AML-TF/KYC rules is one of the biggest challenges that the purchaser of the e-money institution may face. You need to keep in place all appropriate representations, guarantees, and assurances, that any client misconduct won’t be a trap for you.
  • Draw up a SPA that comprehensively explains the phases of the deal and the terms for the closure. Do not promise things that are out of your control by inserting specific timing for the DD and regulatory approvals. Usually, the time necessary for these procedures is hard to measure and can take much longer than predicted.
  • To ensure the closure of the SPA is successful, use the services of a well-respected 3rd-party escrow intermediary. Hence, all payments alongside advance payments pass through the intermediary and guarantee a transparent process. In addition, consider working with qualified consultants for performing the DD, as typical accounting companies would not have deep expertise in the specific sector and pitfalls regarding the regulatory obligations.

Business and operational aspects

In regard to aspects of operating and management of an EMI for sale, it crucial is to consider the following:

  • If the company has already been in operation, analyze the client portfolio, prices, and terms, etc. Once you are an authorized owner of the firm, you may have to intermit some services rollout, change pricing, and stop servicing certain clients (if they possess risk). You must keep in mind that lots of these shifts will require a notification to the clientele within 60 days, which may stimulate further complaints to the financial services ombudsmen and regulatory agencies. The ongoing profit stream may be substantially reduced or even dried out at all, so look for reducing purchase costs respectively, if possible.
  • Learn the risks connected with the agreements signed by the firm with the partnering organizations, especially with banking institutions. Pretty often, the change of ownership leads to a necessity to ask for a 3rd party’s permission for such an operation. Often, a new DD process is initiated, so be ready to start the audit and integration process from the very beginning after you become an owner of an AEMI. There is a substantial risk that these partners may impose a temporary ban on the provision of services to the firm if the purchaser did not adhere to the standards laid down in the agreements. It may reduce the firm’s profitability and stimulate client complaints.
  • You may have to hire new employees, perform extra training, etc. Also, you need to operate according to statutory employment rights and when necessary, conduct the proper dismissal procedure. Any EMI consists of individuals and technologies, so do not undervalue the significance of dedicated employees and appropriate capital contribution that may be needed there.

EMI for sale or new EMI license

Choosing between an EMI for sale and a new license, such aspects as the terms of receiving change of ownership approval or a new authorization are not decisive factors, as both are equivalent in that relation. However, purchasing a ready-made EMI that comes without IP technologies, 3rd-party contracts, and client base is not a good choice, as the main value of such a company is the license itself.

New authorization will be 2-4 times cheaper and will last approximately the same time as the acquisition of a ready-made company. Moreover, with a new license, you don’t need to think about possible liabilities, veiled obligations, client complaints, and many other crucial matters that may catch you after purchasing a shell. However, the purchase of an operational company is justified when you are acquiring an existing lucrative company with proprietary technology and a client base where everything is ready to start the ball rolling.

If you are looking for an EMI for sale or willing to apply for a new EMI license, Eternity Law International will gladly assist in this regard. Our lawyers are committed to providing you a comprehensive support at each step of the application and purchase process. To learn more, please contact our specialists. You can also see our offers in the categories “Ready-made companies”“Licenses for sale” and “Banks for sale”.

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