The High Court has provided helpful clarification on the interpretation of the eligible investor exemption under the Financial Markets Conduct Act 2013 (FMC Act). Offerors do not need to conduct their own investigations about the grounds in the certificates, but nevertheless cannot accept certificates that are patently defective.

This decision has important implications for offerors and investors seeking to rely on this exemption.

Concerns over misuse of eligible investor certification 

The FMA asked the High Court to clarify the requirements for relying on the eligible investor exemption, following concerns that misuse of the exemption may be allowing retail investors into wholesale investments without the same protections of a regulated retail offer, in breach of the FMC Act.  

Eligible investors are a subset of wholesale investors who must self-certify that they have the appropriate experience to invest in wholesale offers. The certificates they provide must be confirmed by a New Zealand financial adviser, lawyer, or accountant. Examples of misuse cited by the Financial Markets Authority (FMA) include where the certificate contained patently defective grounds (or no grounds at all) to support the investor’s ability to evaluate the proposed investment, and yet were confirmed by a New Zealand financial adviser, lawyer, or accountant. 

Wholesale investment offers do not have the same protections as retail investment offers. This is because wholesale investment offers are aimed at experienced investors, who are treated as being “savvy” enough to evaluate the proposed investment, without requiring additional disclosure and other protections under the FMC Act. 

The stakes are high for wholesale investment offerors. If any investor turns out not to be a wholesale investor, the entire offer is tainted and the extensive requirements relating to retail offers ought to have been complied with. The offeror is then at risk of significant regulatory penalties.  

In this context, the FMA’s decision to seek clarification from the High Court was a welcome move.

The key findings of the High Court are that:

1.    Grounds must be capable of supporting the certification, but do not need to disclose objectively sufficient investment experience

An eligible investor certificate must state the investor’s own grounds on which they consider they qualify, but those grounds do not need to disclose sufficient investment experience in order for the certificate to be “valid”, provided the grounds are not (on their face) incapable of supporting the certification - even if the grounds may appear to be “thin”.

Examples of grounds that (on their face) would be incapable of supporting the certification include: 

• “we have other investments and one of our investments fell due”
• “we have previously owned a rental property”
• job experience completely unrelated to the nature of the investment (with the Judge using the example of a trapeze artist).

If no grounds are provided at all to support the certification, the certificate is also clearly invalid.

If the certificate contains grounds that are (on their face) incapable of supporting the certification, then the certificate is invalid, even if it has been confirmed by a New Zealand financial adviser, lawyer or accountant.

2.    No positive assessment or verification of investor’s actual experience is required

The offeror, and the financial adviser, lawyer, or accountant confirming the certificate, do not need to verify the investor’s actual experience, or undertake a positive assessment to satisfy themselves that the investor’s stated experience does in fact enable the investor to evaluate the proposed investment.

All that is required of the financial adviser, lawyer, or accountant is that, after having regard (only) to the grounds stated in the certificate, the financial adviser, lawyer, or accountant has no reason to believe that the certificate is incorrect, or that further information or investigation is required as to whether the certification is incorrect (eg if the grounds appear to be “thin”).

3.    Offeror can treat confirmed certificate as valid

The offeror must be satisfied that the certificate is valid having regard only to whether the certificate meets the requirements on its face, and not to extraneous matters. This does not mean that the offeror needs to second-guess the investor’s capability, but simply that certificates that do not address the regulatory requirements on their face must not be relied on. If the certificate complies with the regulatory formalities and is confirmed by a financial adviser, lawyer or accountant, the offeror can rely on the certificate as being valid - unless:

• the grounds provided in the certificate are clearly incapable of supporting the certificate such that it must have been evident to the offeror that the confirmation was invalid - on the basis that the confirmer must in fact have had reason to believe the investor’s certification was incorrect and so could not validly give the confirmation; or
  
  
• the offeror knew for a fact that the investor did not have the relevant investment experience, or knew or had reasonable grounds to believe that the financial adviser, lawyer or accountant confirming the certificate was conflicted (eg if they were an associated person of, or a recent adviser to, the offeror).

4.    Offeror must refuse ineligible investors or comply with retail offer requirements if certificate is invalid

If the certificate is invalid, then the investor must not accept the investment unless the investor can qualify as a wholesale investor on another basis. Otherwise, the offeror will need to treat the whole offer as a retail offer regulated under the FMC Act, and a product disclosure statement will need to be lodged and provided to all investors under the offer. Additional requirements apply to retail managed investment scheme and debt securities offers.

The Court also observed that if the current regime is considered to be deficient such that there is a need to “re-balance” the approach to the eligible investor exclusion or the prescribe further information that must be included in eligible investor certificates, then this is a matter for further regulation or Parliament, and not the Court.

FMA will continue to monitor the use of eligible investor certification

The FMA have stated that they will continue to work with MBIE on the appropriate policy settings for the wholesale investment regime, and will continue to take action against conduct that misleads people into these wholesale investments, when they need the protections afforded by retail investments. 

Questions

Offerors of wholesale investments should have processes to satisfy themselves that an eligible investor certificate is valid. Offerors may wish to revisit their processes, in light of the key findings of the Court discussed above. We can help with this. Please get in touch with one of our experts.