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18.11.2021

News

Moving the goalposts on the sophisticated investor test

There has been talk in the press in recent weeks of changing the wholesale (or sophisticated) investor test in the Corporations Act to increase the thresholds. The argument ‘for’ is based primarily on the fact the tests have not been changed since they were introduced in 2002 and the impact of inflation has seen the number who qualify as ‘wholesale’ increase significantly. I think this is an overly simplistic view.

The ‘wholesale market’ makes up a very large and important part of the investment capital flows into financial products in Australia. Providers of financial products to wholesale investors are still regulated by ASIC. While the requirements when delivering financial services to wholesale clients are lower than for retail investors, the primary difference between retail and wholesale offers is there is no need for a regulated disclosure document when promoting wholesale offers, nor do wholesale offers have to comply with the recently introduced design and distribution obligations. However, the obligation for promoters to be licensed by ASIC remains and the general obligation not to mislead or deceive when promoting your offer remains.

Lifting the sophisticated investor test from $2.5 million in assets or $250,000 in annual income to, say, $5 million in assets will simply make the pool of wholesale investors smaller. Does this really achieve anything other than moving a portion of the population from wholesale managers to retail managers, making the big managers bigger, and raising the barriers to entry for the industry?

The purpose of our securities laws is to reduce fraud. While I can’t quote statistics, in our 25+ years of operating in the industry, I don’t believe the instances of wholesale investors being separated from their hard-earned investment capital by unscrupulous managers is any greater in the wholesale space than the retail space. The Hayne Royal Commission is a clear example of the fact increased regulatory scrutiny of retail providers does little to temper poor investor outcomes.

While I can see an argument for removing the family home from the assets test, simply raising the monetary limits is a blunt instrument premised on the fact people with more capital are more sophisticated. This is simply not true. On that basis, it is not a sensible solution.


Authors

Sean McMahon

Sean McMahon

Managing Partner

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