Raising capital can be difficult in the best of times. The COVID-19 environment has thrown up even more challenges, particularly in the retail investment sector where ASIC is concerned about heightened vulnerabilities for consumers.

Under the Corporations Act (Act), investors are presumed to be retail unless an exemption applies. Raising funds from retail clients generally requires preparing and issuing a regulated document such as a PDS. If funds are only raised from wholesale clients, then such a document, and the associated cost and compliance, is not required.

Here, partner Langton Clarke looks at some of the wholesale client tests and shares some tips which may make sourcing capital a little easier.

$500,000 exemption

One of the longest standing carve-outs from the retail client classification is the $500,000 exemption. Investors who subscribe that amount of capital for a financial product or service are deemed wholesale under the Act. Whilst this minimum threshold has been in place for some time (it has not even increased by CPI over the years), it is still a large amount for investors to subscribe. However, product issuers can avail themselves of some useful provisions in the Act's regulations:

• The price of several products acquired in the same transaction can be aggregated for the purpose of calculating the $500,000 minimum. The products must be issued about the same time and be in the same class (for example, units in the same fund). This allows the spreading of a $500,000 investment across tightly held related entities.
• An investor subscribing for financial products on a partly paid basis will be wholesale if the total capital commitment is at least $500,000 and there is an appropriate arrangement in place to pay that capital. This would ordinarily take the form of a subscription agreement, but the drafting must be carefully considered to comply with the exemption. Curiously, acquiring tranches of products on a fully-paid basis falls outside the exemption, even though $500,000 might ultimately be paid.
• Related bodies corporate of wholesale clients are also taken to be wholesale. This essentially covers holding companies or subsidiaries.

High net worth investors

Another common exemption from the retail client classification is the provision of an accountant's certificate confirming a person has minimum net assets ($2.5 million) or gross income ($250,000 per year for the past two years). Under relief granted by ASIC across the board, the person's net assets and gross income are taken to include the assets and income of trusts and companies they control.

20/12 rule

Subject to meeting some strict requirements around offers to identified investors, up to $2 million can be raised from no more than 20 investors in rolling 12-month periods without a regulated capital raising document. These investors can still be defined as retail. See our article Small scale offers – have you weighed up your options? in this edition of Fundamental for more detail on this exemption.

The fine print

There are of course some limitations. In calculating the $500,000 minimum investment amount, funds lent to an investor by a product issuer or its associate cannot be counted. Also, superannuation lump sum payments must be disregarded if the product issuer knows, or ought reasonably to know, that is the source of the funds provided by an investor. In the current environment, where early access to superannuation money has been mandated, this must be borne in mind.

Finally, the 20/12 rule provides an exemption from the disclosure document requirements only. Issuers must still consider whether there are any financial licensing implications.

How can we help?

Our Funds Management team can provide you with advice around the wholesale client tests so that you understand your obligations and compliance requirements.