Sophisticated and Professional Investors – What are they?

The Corporations Act 2001 (Cth) (“The Act”) in s708(8) states that an offer of shares does not need a disclosure statement if the investor is a sophisticated investor. The Corporations Regulations 2001 (“The Regs”), Reg 6D.2.03 goes on to advise that a sophisticated investor is one with assets of $2.5m, gross income of $250,000 and a statement from an accountant attesting that the investor had said income for the previous two financial years.

A professional investor is defined by s 9 of The Act, and must satisfy on of the following provisions:

• The person is a financial services licensee; or
• The person is a body regulated by APRA; or
• The person is a body registered under the Financial Corporations Act 1974; or
• The person is a trustee within the meaning of the Superannuation Industry (Supervision) Act 1993 and fund, trust or scheme has assets of at least $10m; or
• The person controls at least $10m is assets; or
• The person is a listed entity; or
• The person is an exempt public authority; or
• The person is a body corporate that:
• Carries on a business of investment in financial products; or
• Invests fund received (directly or indirectly) following an offer or invitation to the public; or
• Is a foreign entity, either established or incorporated in Australia and is covered by one of the preceding items.

Disclosure Statements

Further to the above, under s708(10)(b) of the Act, the holder of a Financial Services Licence can offer securities without the need for disclosure statement, if they are satisfied on reasonable grounds that the person to whom the offer is being made to has previous experience in investing, that is, they are either a sophisticated or professional investor. To do this the Licensee must look at:

• The merits of the offer; and
• The value of the security; and
• The risks involved; and
• Their own information needs; and
• The adequacy of the information given by the person making the offer; and
• The licensee gives the person either before or at the time of the offer a written statement listing the reasons for being satisfied as to matters 1 – 5; and
• The person to whom the offer is made either before or at the time the offer is made, signs a written acknowledgement that the licensee has not provided a disclosure statement.

This was confirmed by Barrett J in Australian Securities and Investment Commission v Elm Financial Services Pty Ltd & Anor [2005] NSWSC 1065 (“Elm”), per [10],

“The requirement that the licensee be “satisfied on reasonable grounds” as to the matters stated in s708(10)(b) is one that must be approached with diligence and care. The licensee has a statutory duty to make inquiry about all matters relevant to the opinion it must form and then, of course, to consider whether, in the factual circumstances, there exist the reasonable grounds for it to be satisfied as to the matters stated.”

Failure by the licensee to be satisfied on reasonable grounds and provide reasons for determining those grounds may result in the Financial Services Licensee being in breach of s180(1)[1] of the Act.

The Elm case affirms that the onus is on the financial services license holders to make sure that the investor is either sophisticated or professional investor. This was stated by Barrett J at para 8:

“He (Director of Elm Financial, Mr Terracini), therefore carried a particular responsibility to take reasonable steps to ensure that those affairs were conducted in accordance with the law and in an honest way.”

This was further upheld in ASIC v Maxwell & Anors [2006] NSWSC 1052 by Brereton J at [50]:

“The licensee’s satisfaction on reasonable grounds of the matter referred to in s708(10)(b) is a condition of the availability of the exemption, and requires that the licensee sufficiently investigate the experience of the investor to form the relevant opinion.”

The burden to show that the investor was sophisticated or professional, either before, or at the time of the offer was made lies with the Financial Services License holder and accordingly it is important to ensure your legal documents are well drafted and you have policies and procedures in place so you are not in breach of your obligations.

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This article is not legal advice and should not be relied upon as legal advice. All articles found on this website are intended to provide informative information, nevertheless, in many instances legislation and case law has been simplified and/or paraphrased. If you would like personal legal advice based on your current circumstances, you should contact MurdockCheng Legal Practice for a free consultation.

[1] Corporations Act 2001 (Cth) s180(1) – Failure to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise.