Eligible Investor Certificates: High Court Submissions and Key Implications
In recent submissions made to the High Court, the Financial Markets Authority (FMA) has sought clarification on when eligible investor certificates can be used and relied upon for the purposes of a “wholesale offer” of financial products.
Understanding wholesale investor exclusion
The Financial Markets Conduct Act 2013 (FMCA) establishes strict disclosure requirements for offers of financial products. However, these rules are more flexible where an offer is made under one or more of the exclusions listed in Schedule 1 of the FMCA. This includes offers made to “wholesale investors”.
A wholesale investor is a person or entity with prescribed characteristics indicating sufficient financial sophistication to assess and manage the risks of complex or higher-risk financial products. This is typically based on their total assets or income, status, or previous experience with financial products.
Wholesale investors receive fewer legal protections than retail investors under the FMCA. In particular, offers made to wholesale investors do not require the same level of disclosure as those made to retail investors, such as a product disclosure statement or “PDS”.
Additionally, if a wholesale investor experiences any loss or damage from participating in a wholesale offer, their ability to seek recourse is limited to the rights and remedies available under the general law and/or any specific liabilities the wholesale offeror has assumed under the offer documents.
What is an Eligible investor?
An “eligible investor” is a type of wholesale investor who self-certifies their financial knowledge and experience with financial products. This certification must then be confirmed by a lawyer, accountant or financial adviser. These certificates must state that the relevant investor possesses sufficient financial knowledge to:
- assess the merits of an offer;
- understand their information needs; and
- evaluate the adequacy of any information received without requiring full disclosure.
Key issues raised by the FMA
The FMA’s submissions highlight several key issues regarding how eligible investor certificates should be used and relied upon, including:
- Express grounds: An individual certifying themselves as an “eligible investor” must explicitly state their previous experience with financial products and explain how it enables them to assess risk and information adequacy.
- Independent inquiries: When receiving an eligible investor certificate, a wholesale offeror must not solely rely on the confirmation of a relevant professional. Instead, offerors must conduct their own independent inquiries to verify the validity of the certificate before relying on it.
- Disclosure required: If an offeror is unable to rely on an eligible investor certificate, they will need to provide full disclosure in accordance with Part 3 of the FMCA, including preparing a PDS.
Why is this important?
The outcome of these submissions is likely to result in more certainty and consistency with how eligible investor certificates are handled in practice. However, it also raises important considerations about balancing investor protection with compliance costs:
- Clear disclosure of experience: Requiring investors to explicitly state their relevant experience helps ensure that only those with genuine financial sophistication qualify as eligible investors. This benefits both offerors and certifying professionals by providing greater clarity about an investor’s ability to assess risks.
- Offeror verification: Requiring offerors to conduct their own independent inquiries may help prevent situations where an investor unintentionally or falsely certifies themselves as eligible. However, this also introduces additional compliance burdens, particularly for smaller offerors who may lack the resources to undertake such verification efficiently.
- Disclosure in the absence of certification: If an offeror cannot rely on an eligible investor certificate, full disclosure under Part 3 of the FMCA will be required. While this ensures that investors receive all necessary information, it also significantly increases compliance costs. Preparing a PDS is a complex and expensive exercise, which may deter some businesses from making offers altogether, reducing investment opportunities.
Looking ahead
A key challenge for regulators and market participants is ensuring that investor protections are robust without imposing undue compliance costs that may limit access to capital markets. Striking the right balance is essential to maintaining an efficient and well-functioning financial market.
We will be watching the High Court’s decision on this matter with great interest.
If you have any queries about eligible investor certificates or financial markets law generally, please do not hesitate to contact one of our Commercial team.