Higher Standards for ‘Sophisticated Investors’: What This Means for Your Disclosure Obligations (2024)

Background

Before a person can purchase securities (including shares and debentures) or some financial products (such as interests in managed investment schemes), the Corporations Act requires that the person be issued a regulated disclosure document such as a prospectus or product disclosure statement.

These disclosure obligations serve to protect retail ‘mums and dads’ who are proposing to make an investment (and to ensure they are properly advised on the terms and risks of that investment). This requirement can be a disruption to companies seeking to raise capital because of the time and expense associated with making such disclosures.

However, the Corporations Act includes a number of exemptions from these disclosure requirements. One of these exemptions includes an offer of securities to a person who is a ‘sophisticated investor’.

Under the current thresholds, a sophisticated investor includes a person:

1. 1

   (Value Test) who is offered securities for a price payable of at least $500,000;

2. 2

   (Asset Test) who has net assets of at least of at least $2.5 million; or

3. 3

   (Income Test) who has a gross income for each of the last two financial years of at least $250,000 per annum.

Satisfaction of the Asset Test or the Income Test must be evidenced by a certificate given by a qualified accountant no more than 6 months before the offer of securities is made.

ASIC's calls for a threshold increase

At the end of 2023, the Australian Securities and Investments Commission (ASIC) made submissions to the Treasury on its consultation paper seeking feedback on the appropriateness of the existing regulatory settings for managed investment schemes.

ASIC cautioned that the current financial thresholds (which have not been indexed since their introduction in 2001) have increasingly resulted in investors with limited financial knowledge or experience accessing investments without appropriate levels of disclosure or consumer protections.

ASIC recommended that the financial thresholds used to classify ‘sophisticated investors’ and wholesale clients be increased to reflect inflation to the present date, together with a proposal for annual increases to occur in line with inflation.

If ASIC’s recommendations are to be implemented, it is anticipated that the new thresholds to qualify as a ‘sophisticated investor’ will be as follows:

ASIC did not provide any comment on whether certain assets should be excluded from the Assets Test, with Treasury raising in the consultation whether a person’s main residence and/or superannuation balances should be excluded from Asset Test calculation.

where to from here?

Despite the above being only recommendations from ASIC at this stage, and that various industry stakeholders have made submissions against such recommendations, it is anticipated that the 'sophisticated investor' thresholds will increase.