Tuesday, 22 May 2018
Think you've found a loophole in the 'sophisticated investor' test? ASIC says think again!
Date : 13 July 2017
Author/s : Daniel Goldberg, Rebecca Dooley
Type : Focus Paper


There's no easy way around disclosure issues when raising money by issuing securities or other financial products to retail investors.

Last week ASIC announced that:


  • it is "concerned that some accountants may be harming retail investors by inappropriately providing 'sophisticated investor' certificates"; and
  • it is "aware that, in certain recent fundraisings, some accountants have used trust or company structures that purport to allow investors who are not "sophisticated investors" to receive offers to purchase shares without a prospectus or other disclosure document."

ASIC said that this had occurred recently in relation to offers of shares by Kwickie International Limited (Kwickie) and made a formal declaration that Kwickie shares may not be offered to retail investors through a trust structure.

ASIC noted that it is continuing its investigation into the use of these structures and that it is in discussions with the appropriate professional accounting bodies about the issue. 

So what is going on here?

‘Sophisticated Investor' Test

Under the Corporations Act 2001 (Cth) (Corporations Act), an offer of securities to an investor does not require a prospectus or other regulated disclosure document if:


  • the minimum amount payable by the investor for the investment is at least $500,000; or
  • a qualified accountant has given a certificate in the last 6 months stating that the investor:
    • has net assets of at least $2.5 million; or
    • has a gross income for each of the last 2 financial years of at least $250,000.

If an individual investor does not satisfy at least one of these criteria (and no other exceptions apply), then full prospectus disclosure will generally be required when making an offer of securities to that investor.

It appears, however, that some accountants have been seeking to facilitate fundraisings without prospectus disclosure by aggregating a number of retail investors into a "feeder" company or trust structure. When all of the investors' contributions are aggregated in this way, the company's or trust’s investment amount or assets might exceed the monetary thresholds described above. In other words, the feeder company or trust itself could satisfy the 'sophisticated investor' test despite none of the actual investors in that company or trust meeting those requirements.

Not so fast!

ASIC has broad powers to make declarations and other orders in respect of the fundraising provisions of the Corporations Act. Where ASIC perceives that an abuse of the legislation is occurring, it will use those powers.

ASIC also has explicit powers to aggregate transactions where it perceives that structures are being adopted to avoid the application of the disclosure requirements.

In this case, ASIC has made a declaration that Kwickie shares may not be offered to retail investors through a trust structure.

What other issues arise?

Depending on the situation, there are likely to be other problems with seeking to use a feeder company or trust to avoid the operation of the disclosure provisions.

For example, a trust will almost certainly constitute a managed investment scheme under the Corporations Act. Depending on the number and nature of investors in that trust, and the person promoting it, the scheme may need to be formally registered with ASIC, which carries a range of additional compliance obligations and prospectus-level disclosure requirements for the trust to raise money.

In addition, in its statement ASIC reiterates that accountants (and others) cannot provide financial product advice in relation to securities or interests in managed investment schemes unless they hold an Australian Financial Services Licence (AFSL) or are a representative of an AFSL holder. 

We can help you navigate through the disclosure, licensing and other requirements in relation to a fundraising. Don't take the Kwick & dirty path!

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