For the past 20 years, the Corporations Act has allowed investors who obtain a certificate from an accountant to be classified as a ‘sophisticated investor’. If you meet the test, then the issuer of the financial product does not need to provide the more stringent product disclosure statement that would ordinarily be required. To qualify, you either need to have net assets of $2.5 million or have a gross income of at least $250,000 per annum for the last two years.
The rule has been in place for almost 20 years and has never been updated. ASIC seriously needs to look at replacing the test.
We have seen numerous examples where investors have met the test but are clearly not ‘sophisticated’ in the sense of what was envisaged when the rule was first introduced.
Madgwicks has been involved in two high profile ‘wholesale fund’ collapses in the last 6 months where the investors in question are anything but what you would call ‘sophisticated’. In the most recent example of the collapse of the iProsperity Group, we have had to engage a Mandarin interpreter to obtain instructions from a number of investors who are largely based in China, speak no English, have little financial literacy and clearly had no idea what they were investing in regardless of the number of ‘forms’ they may have been asked to sign to acknowledge that they did understand.
Attending creditors meetings (these days via Zoom) I sadly shake my head when it is readily apparent that the investors ‘tuning in from overseas’ are unrepresented, cannot follow what is happening because they speak little or no English and have no idea whether they will recover their money. Yet, the rules allowed them to be classified as ‘sophisticated’.
The financial products in question are often challenging to understand for a seasoned financial analyst or a lawyer with experience in the area let alone your average ‘sophisticated investor’. In many cases, these investors have parted with millions of dollars and have been lured by the Significant Investor Visa Government Programme and the only ‘disclosure’ they see is an ‘Information Memorandum’ as to which there are few rules on minimum content (because the schemes in question are classified as ‘wholesale’).
These Investors are often dumbfounded when I explain to them (through an interpreter) exactly where their money has gone (assuming I can find that out which is often a challenge). How can they be called ‘sophisticated’ when they don’t speak English, cannot read the Information Memorandum and have no idea where their money has gone. What can be said is that the financial and legal structures deployed in these ‘wholesale’ products are very sophisticated involving a high degree of financial ‘engineering’.
The recent high-profile collapses that have left a trail of financial destruction highlight that there is an urgent need for ASIC to examine and change the rules in a similar fashion to how lenders now obtain certificates of independent legal and commercial advice for lending transactions. I would advocate that where English is not the native language of the investor there should also be a certificate provided by an independent interpreter.