Thresholds up, investment down? Why Australia’s sophisticated investor threshold increases could prove costly | Hogan Lovells

The Australia Corporations Act 2001 (Cth) requires that any person wishing to purchase securities or financial products be provided with a regulated disclosure statement such as a product disclosure statement or a prospectus before buying securities (Chapter 6D) and some financial products (Chapter 7).

There are certain exceptions. Disclosure is not required where a person is a “sophisticated investor”, based on certain income, value and asset thresholds. The safeguards are there to protect retail investors and to make sure they are properly advised on the terms and risks.

The current thresholds include:

1. A person who is offered securities for a price payable of at least AU$500,000 (product value test)
2. A person who has net assets of at least AU$2.5 million (asset test)
3. A person who has a gross income for each of the last two financial years of at least AU$250,000 per annum (gross income test)

These thresholds were published in the Corporations Act in 2001 and have not been indexed since. The Australian Securities & Investments Commission (ASIC) argue that this has meant that investors with limited investing experience or knowledge have been able to access investments without appropriate levels of protection.

The proposed increases would mean that the threshold for the product value test would rise from AU$500,000 to AU$900,000; the threshold for the net assets test would increase from AU$2.5 million to approximately AU$4.5 million; and the threshold for the gross income test would increase from AU$250,000 per annum in the last two financial years to AU$450,000 for the same period. Going forward, the thresholds would be adjusted annually to account for inflation.

ASIC’s suggestion was included in a response to a consultation issued by Treasury on a review of the regulatory framework for managed investment schemes.

Disincentive to investment?

The proposed increases have been criticised for cutting off investment to start-ups whilst doing little to protect investors. Critics say that preventing access to certain financial products deprives access to those who understand the risks present in such investments.

A petition urging the government to reconsider launched by an angel investor group has gathered more than a thousand signatures. The petition’s backers said that “start-ups, the heartbeat of innovation, heavily depend on early-stage catalyst funding to thrive. These proposed changes, with increased thresholds, risk constraining the growth of our vibrant start-up ecosystem”.

Instead, the group suggest there should be a certification process overseen by ASIC that could ensure knowledgeable individuals in the start­-up sector have access to investment opportunities without the creation of unnecessary barriers.

Way ahead

Despite the objection of several stakeholders, it is likely that the financial thresholds will increase and that the increases will apply not just to the sophisticated investor test but also to the “wholesale client” test under Chapter 7, so bringing the two regimes into alignment, something viewed by the regulator as a positive for the proper functioning of Australia’s financial services markets.