SMSF trustees looking to access wholesale investment products may be able to meet the definition of a sophisticated investor by counting their fund as a legal entity and jointly acting with it in making an investment, according to a legal firm.
Townsend Business and Corporate Lawyers principal Peter Townsend and solicitor Dominique Perry said the Australian Securities and Investments Commission stated in 2014 that an SMSF could be considered a sophisticated investor.
“You may ask why someone would want to be a ‘sophisticated investor’. Fundamentally because investment product providers then do not have to provide the investor with the usual disclosure documents (eg prospectus or product disclosure statement), which therefore allows the investor to access so-called ‘wholesale products’ which are perceived by the market to be more attractive investments,” Townsend and Perry said in a blog post.
They noted that under the Corporations Act 2001, to be considered eligible for a sophisticated investor certificate an investor must have had a gross income of $250,000 or more per year in the past two years or own net assets worth more than $2.5 million, with the latter being able to include the net assets of the investor plus the net assets of a company or trust controlled by that investor.
Townsend and Perry further noted these requirements can additionally apply to separate members who are directors and equal shareholders of a corporate SMSF that does not meet the net asset value amount.
“Section 23 of the Acts Interpretation Act 1901 (Cth) states that in commonwealth legislation (which the Corporations Act is) the singular includes the plural and vice versa. Therefore the reference in s708(8)(c) to ‘the person to whom the offer is made’ can include more than one ‘person’,” they said.
“It is open to argue that multiple ‘persons’ constituting the offeree could jointly be eligible for denomination as a ‘sophisticated investor’ and the totality of their assets could be counted.”
They highlighted that trustees together or as individuals could, jointly with their SMSF, be considered as a ‘person’ to whom a wholesale offer can be made.
“There would appear to be no legislative requirement for any proportionality for the tests to operate in the context of a joint offeree so there are no requirements that the sharing of the investment be in any particular proportion, provided that all entities own some of the investment offered,” they said.
“Careful consideration would need to be given when involving a fund in a joint ownership with a member to ensure all self-managed superannuation compliance tests are met, including particularly the sole purpose test. The investment by the fund would have to accord with the fund’s investment strategy also.
“So far there appears to have been no regulatory or judicial pronouncement on this multiple offeree arrangement so no guarantee of success can be given at this point.”