The Australian Securities and Investments Commission (ASIC) has taken action over the misuse of sophisticated investor certificates after it found some accountants have facilitated retail investors acquiring shares offered by a company without adequate, or any, disclosure.
Under the Corporations Act, accountants are entrusted with an important role: by providing a certificate attesting to the assets or income of a person, the accountant can attest that a person is a ‘sophisticated investor’ and therefore does not need the protections that apply to a retail investor.
ASIC said it was aware that, in certain recent fundraisings, some accountants had used trust or company structures that purported to allow investors who were not sophisticated investors to receive offers to purchase shares without a prospectus or other disclosure document.
The corporate watchdog said this recently occurred in relation to offers of shares by Kwickie International.
The regulator last week made a declaration, to put the issue beyond doubt, that Kwickie International shares could not be offered to retail investors through a trust structure.
ASIC said it was continuing its investigation into the use of these structures and also was in discussion with the appropriate accounting professional bodies about the issue.
It said it was important the sophisticated investor test was applied in a way that was consistent with the reason those provisions were in the law, otherwise retail investors would not be afforded the safeguards in making appropriate investment decisions that the law explicitly provided for.
ASIC added accountants needed to be careful not to recommend or otherwise provide financial advice unless licensed.
In 2014, ASIC clarified how it applied the wholesale investor test to SMSFs with a change that brought many SMSFs into the wholesale category.
Where the financial services relate to a superannuation product, a trustee of an SMSF will be classified as a retail client under the Corporations Act unless the fund holds net assets of at least $10 million at the time the service is provided.
If a financial service does not relate to a super product, the general test for determining whether the trustee is a retail or wholesale client applies under the Corporations Act.
Under the general test, the circumstances in which the trustee will be a wholesale client include if the trustee has a certificate from a qualified accountant stating they have net assets of $2.5 million or if the value of the investment is at least $500,000.
Given the importance of retail client consumer protections, ASIC will take regulatory action where financial service providers miscategorise their clients and, for example, treat investors as wholesale clients based on net assets of $2.5 million without a certificate from a qualified accountant.
