In a press release dated 23 December, the FMA announced that it had filed a case stated proceeding, seeking a High Court determination about the use, confirmation, and acceptance of ‘eligible investor certificates’ for ‘wholesale’ investments – relying on one of the key hard-wired exceptions from the FMC Act disclosure regime.
The press release says that the FMA has done so following investigations into the use of ‘eligible investor certificates’ by ‘wholesale’ property developers. And that the FMA’s investigations follow the FMA’s 2022 thematic review of ‘wholesale’ offers of financial products.
The press release says that the purpose of the case stated proceeding (seeking the Court’s opinion on a question of law) is to provide (market) clarity on the use of ‘eligible investor certificates’ – and ensure that those investors who require the protections provided by the FMC disclosure regime, receive them.
Whilst the case stated is not heralded as action taken against a specific party, the detail of the proceeding is a little more complicated and appears to focus on a sort of straw man (referred to as Offeror A) arising out of the FMA’s 2022 thematic review.
Questions for the Court
The press release says that the FMA is asking the Court’s opinion on the ‘eligible investor exclusion’ and a detailed series of questions of law.
The 2022 thematic review was triggered by an increase in complaints about practices by a number of offerors relying on the use of ‘eligible investor certificates’ and other branches of the ‘wholesale investor exclusion’ when seeking to raise funds. The use appeared to be particularly prevalent in relation to fundraising by property developers – although the straw man (Offeror A) referred to in the case stated proceeding may not be a property developer (because it is described as a licensed managed investment scheme manager – which the property developers referred to in the 2022 thematic review were not).
It is well known that the FMC Act disclosure regime contains important exclusions for offers of financial products made to ‘wholesale investors’. Financial products that are the subject of a ‘wholesale’ offer are also excluded from the governance and financial reporting requirements under the FMC Act that apply to regulated offers. These, hard-wired exclusions, are provided on the basis that ‘wholesale investors’ have sufficient knowledge and experience to assess an offer – as well as manage their ongoing reporting and other needs.
Some of the categories of ‘wholesale investor’ are determined by reference to objective criteria, whereas qualification for the ‘eligible investor’ sub-category relies on (arguably) more subjective matters and also requires a process of both self-certification and a third party sign-off.
The questions framed for the High Court in the case stated proceeding are described by the FMA as being questions of general application. However, the application states that, for context, and to assist the Court in its understanding of the proper interpretation of the ‘eligible investor’ exclusion and its application in practice – it is necessary to rely on the straw man.
Specifically, the application describes a number of practical scenarios and asks the Court to determine whether an ‘eligible investor’ certificate would be valid in each case. These include:
| 1. | Whether an ‘eligible investor certificate’ needs to expressly describe: (i) the previous experience that [the investor] has in acquiring or disposing of products; and (ii) the aspects financial of the investor’s] experience in acquiring or disposing of financial products which they consider would enable them to assess the matters required by paras (a) – (c) for the transaction to which it relates? | The position taken by the straw man and/or other ‘wholesale’ offerors – is that neither (i) nor (ii) is required. Instead, that [the investor] is required only to certify they have experience in acquiring and disposing of financial products (i.e. without stating what those financial products are). |
| 2. | For an offeror to rely on an ‘eligible investor certificate’, or otherwise treat an investor as an eligible investor, in respect of the transaction to which it relates, does the offeror need to be satisfied that – the ‘eligible investor certificate’ is valid? | Both the FMA and the straw man and/or other ‘wholesale’ offerors – see this as a must have. |
| 3. | Whether, in the context of an offer of financial products, based on the grounds stated in the certificate, [the investor] could make the assessments requirement by paras (a) – (c) in respect of: (A) a financial product of any kind; and (B) the financial products involved in the transaction to which the certificate relates. | The position taken by the straw man and/or other ‘wholesale’ offerors – is that neither (A) nor (B) is required. An offeror is not required to undertake any enquiries, and is able to rely on the experience of the third party certifier (an accountant, lawyer, or financial advisor) who, having considered the grounds provided, confirmed certification. |
| 4. | If the answer is Yes to either #2 or #3 – can an offeror rely on information which is not contained in the ‘eligible investor certificate’? | The straw man and/or other ‘wholesale’ offerors say Yes – the FMA disagrees. |
| 5. | If an offeror makes an offer of financial products to [the investor] in circumstances where it is not permitted to rely on [the investor’s] ‘eligible investor certificate’, is disclosure required under Part 3 of the FMC Act? | The FMA says Yes – the straw man and/or other ‘wholesale’ offerors disagree. |
Note: paras (a) – (c) are contained in clause 41(2) of Schedule 1 to the FMC Act.
What next?
The FMA says that its straw man does not wish to be involved in the case stated and has asked that it not be named. It also says that there is no readily identifiable industry body for the FMA to engage with in the absence of the straw man’s involvement – with the result that there is, at the stage of making its application, no available contradictor.
Therefore, while the FMA has set out (in broad terms) the position it understands to be taken by the straw man and/or other ‘wholesale’ offerors – to show the Court that a contrary position exists, and states that it both:
- wishes to file more detailed submissions in relation to its position; and
- intends to notify entities who may have an interest in the application – and who (along with any contradictor appointed by the Court) may also wish to be heard and file submissions.
There are a number of things that might be said about the application and the lack of an available contradictor. Some of that may depend on the level of canvassing (and any submissions) at the time of the 2022 thematic review. However, one immediate benchmark is available across the Tasman where, early in 2024, the Parliamentary Joint Committee on Corporations and Financial Services commenced an inquiry into the ‘wholesale investor’ test for offers of securities under the Corporations Act 2001. There, in the context of a much larger and deeper pool of industry experience, the inquiry drew submissions from a number of readily identifiable industry groups – including the investment advisory community, the main professional bodies (including the Law Council of Australia and Chartered Accountants Australia and New Zealand), the equivalent of the Law Commission, and most elements of the venture capital industry including the main industry body (previously called AVCAL) and a broad collection of angel investor groups.
The broad thrust of a number of those submissions was to underline the importance of the private capital industry as a critical source of capital for investment into start-ups and growth companies in Australia – and the need to balance regulatory certainty with the law of unintended consequences and not (for example) risk imposing a significantly adverse effect on the availability of capital for start-ups and growth businesses – starving them of capital or driving them offshore.
It is hoped that a broad representation of similar professional bodies and industry groups, including NZ Private Capital and the Shareholders’ Association express an interest in the FMA’s application. However, unlike the Parliamentary inquiry in Australia, the framing of the question as case stated proceedings may mean that some groups need to join forces and share resources.
Given the potential for severe impact on availability of capital to businesses that are additive to the New Zealand economy, and the risk of driving enforcement and/or policy change guided only by the bad examples provided by some property developers, it is hoped that that a some significant effort is made to both achieve the right outcome going forward and consider some sort of grandfathering exercise to ensure that (perhaps other than in cases of egregiously bad behaviour) the shape of capital raising at a wholesale level is not driven by raking over the coals with the benefit of hindsight.