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Investor classifications need revisiting

Some SMSFs will find it more valuable to be considered a wholesale client or sophisticated investor rather than a retail investor, but advisers must familiarise themselves with the associated law and relevant tests, according to a specialist industry lawyer.

“It can be beneficial sometimes for an SMSF to be considered a wholesale client or a sophisticated investor in order to get access to investments that might not be open to retail clients,” Townsends Business & Corporate Lawyers principal Peter Townsend said today.

“This may be because the promoter doesn’t want to go to all the expense and trouble of fully complying with the securities law requirements for retail clients.

“The Corporations Act permits the selling of securities to so-called wholesale clients and sophisticated investors without all the necessary bells and whistles that are required when securities are sold to normal clients.”

Townsend said SMSFs can be classified as wholesale clients and sophisticated investors for the purpose of investing in securities, including bonds, if the trustee provides an accountant’s certificate that states the trustee holds net assets of at least $2.5 million or has income for the past two years equal to or greater than $250,000.

Alternatively, the trust can provide an accountant’s certificate that states the trust is controlled by a person who holds net assets of at least $2.5 million or has income for the past two years equal to or greater than $250,000.

Section 761A of the Corporations Act defines a retail client as having the meanings given by sections 761G and 761G(a), Townsend noted.

“Section 761G provides that everyone is a retail client unless they fall into a specific other category,” he said.

“Section 761G(4) confirms that a financial product or financial services is provided to a person as a wholesale client if it is not provided to the person as a retail client.”

The relevant conditions to determine if an SMSF is a wholesale client are set out in section 761G(7), particularly section 761G(7)(c), he said.

“The ‘person’ referred to in section 761G(7)(c) is the trustee of the SMSF and not the trust – this is because the trust itself is not a legal entity,” he noted.

“The trustee is the owner at law of the assets of the trust which it holds for the benefit of the beneficiaries.

“Therefore the trustee holds the assets of the trust. If the trust has assets of at least $2.5 million, then the trustee, and consequently the trust, becomes a person who can be a wholesale client within the meaning of section 761G(7)(c).”

In addition, he pointed out regulation 7.6.02AB permits a trust, such as an SMSF, to be classified as a wholesale client if the trust is controlled by a trustee who has net assets of at least $2.5 million or has gross income for each of the past two financial years of at least $250,000, regardless of the value of the trust itself.

“An SMSF can also be a sophisticated investors and therefore be given an offer of securities without a prospectus,” he said.

“Sections 708(8)(c) and (d) are similar to sections 761G(7)(c) and (ca), with the investor – the person to whom the offer is made – being required to have minimum net assets of $2.5 million or a minimum gross income of $250,000 for the last two financial years, or being controlled by a person who has net assets of $2.5 million or a minimum gross income of $250,000 for the last two financial years.

“The test being met in section 708(8)(c) is by the person to whom the offer is made.

“By contrast, the test being met in section 708(8)(d) is satisfied where the offer is made to a trust and the trustee – being the person who controls the trust – is a person who meets the requirements in subsection (c).”

The trust can also be classified as a sophisticated investor where it is given an accountant’s certificate that states the trust is controlled by a person who has net assets of at least $2.5 million or has gross income for each of the past two financial years of at least $250,000.

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