Raising the bar for sophisticated investors

By Vanessa Murphy, James Bull and Caitlin Byrne

ASIC has recommended raising the financial thresholds for investors to qualify as ‘sophisticated’ for the purposes of raising capital under Chapter 6D of the Corporations Act. This would mark the first adjustment since 2001.

In its submission on Treasury’s review into the regulatory framework for managed investment schemes, ASIC’s suite of recommendations included increasing the financial thresholds that apply to the ‘wholesale client’ test. This adjustment would result in over two decades of inflation being reflected in the revised test, together with ongoing annual increases. Although not directly covered by Treasury’s review, ASIC also proposed extending this change to the sophisticated investor test, relevant for both listed and unlisted companies.

What will the increased thresholds look like?

If ASIC’s recommendations are implemented:

• the ‘gross income test’ would increase from $250,000 per annum in the last two financial years to $450,000 for the same period;
• the ‘assets test’ would increase from $2.5 million to approximately $4.5 million; and
• the ‘product value’ test, being the threshold price for securities that deems a person to be sophisticated, would increase from $500,000 to approximately $900,000.

In addition, the thresholds would be adjusted on an annual basis to reflect inflation, to prevent another situation where over 20 years of inflation hits at once.

This would result in the bar being raised on who could be issued securities without a prospectus under section 708 (or other Chapter 6D disclosure document). Companies that are not targeting an investor base that meets these increased requirements would need to issue a prospectus (or other disclosure document) or ensure that their investors qualify for other exemptions to statutory disclosure.

Interestingly, ASIC did not recommend certain assets be excluded from the assets test, with Treasury raising in the consultation whether an investor’s main residence or superannuation should be removed from calculating net assets.

Where to from here?

While the proposed changes are only recommendations in response to the current consultation for now, we are expecting that the financial thresholds will in fact increase (despite various industry stakeholders making submissions against it).

No matter where the thresholds end up, it’s logical for the wholesale client test under Chapter 7 and sophisticated investor thresholds under Chapter 6D to be based on the same tests. This alignment is crucial for Australia’s broader financial services laws to function sensibly. Consequently, the results of Treasury’s review on managed investment schemes regulation will likely have more significance for both public and private companies than they may have expected.