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