High Court clarifies offeror obligations under FMC Act's eligible investor exclusion

The High Court has released its judgment in the case stated proceeding brought by the Financial Markets Authority (FMA), seeking clarity on the "eligible investor" wholesale exclusion under the Financial Markets Conduct Act 2013 (FMC Act).

Under the FMC Act, an investor can self-certify as an "eligible investor" on the basis they have sufficient knowledge and experience to assess a proposed investment, provided the certification is confirmed by a financial adviser, qualified statutory accountant, or lawyer. Offerors can rely on these certificates to avoid the offer being a "regulated offer" under the FMC Act.

The FMA was concerned that offerors were relying on eligible investor certificates in inappropriate circumstances and therefore have a positive duty to independently satisfy themselves that the grounds stated in those certificates demonstrate sufficient proof of relevant investment experience. To support its claim, the FMA presented several example certificates to the Court in which it claimed the investor concerned could not have the requisite experience. Some certificates stated the investor had "previously owned a rental property", or that "we have other investments and one of our investments fell due". Other certificates contained no grounds at all in relation to the investor's suggested investment experience.

The FMA's case stated put four questions to the Court, summarised as follows:

• what experience must be expressly described in an eligible investor certificate for it to be valid;
• the extent to which an offeror needs to be satisfied about the eligibility of an investor based on either: (i) the validity of an eligible investor certificate; or (ii) the ability of an eligible investor to assess the merits of a transaction and the necessary information they require to make that assessment;
• if an offeror is required to be satisfied about the eligibility of an investor (as described above), whether an offeror is permitted to rely on information not contained in the eligible investor certificate to make such an assessment; and
• whether disclosure is required if an offeror makes an offer of financial products in circumstances where it is not permitted to rely on an eligible investor certificate.

 

What did the Court say?

The Court confirmed that the eligible investor regime is one of self-certification, with the added protection of confirmation. Requiring offerors to undertake additional verification of the certificates (other than to confirm that they are valid) would undermine the very concept of self-certification and render the confirmation process redundant.

The Court also confirmed that:

• offerors can rely on eligible investor certificates, provided they are valid;
• for an eligible investor certificate to be valid:
  • the investor must:
    • certify their investment experience in writing, including their understanding of the consequences of certification as an eligible investor, before the financial product is issued; and
    • state in the certificate the grounds for that certification, which must not be incapable of supporting the certification (the Court noted that the FMA's examples of "previously owned a rental property" and "we have other investments and one of our investments fell due" would be incapable of supporting the certification);
  • a financial adviser, qualified statutory accountant, or a lawyer must have signed a written confirmation of the certification; and
  • the certificate must be in a separate written document and contain the prescribed warning notice;
• the confirming financial adviser, accountant, or lawyer has a negative obligation not to confirm a certificate if they have reason to believe the certification is incorrect or that further information or investigation is required before the certification can be correct (for example, if the certificate contains grounds which plainly cannot support the investor's certification). There is no positive obligation on confirmers to assess the grounds set out in the certificate to satisfy themselves that the certification is correct. Grounds which are not incapable of supporting the certification can nevertheless be "thin", provided the confirmer has reached the view that they have no reason to believe the certification is incorrect and that no further information or investigation is required; and
• if an offeror makes an offer of financial products to an investor in circumstances where it is not permitted to rely on the investor's eligible investor certificate (and they are not otherwise a wholesale investor), disclosure is required under Part 3 of the FMC Act.

The Court noted that if the FMA considers there is a need to "re-balance" the approach to the eligible investor exclusion, then it may be that the balance struck in the current legislation needs to be reset, which is a matter for Parliament.

 

Our view

We are pleased to have the eligible investor certification process confirmed in the High Court. The judgment appropriately recognises the dual purposes of the FMC Act: (i) investor protection; and (ii) the confident participation of business in financial markets (including avoiding unnecessary compliance costs).

While some may see the judgment as a (costly) confirmation of the status quo, we expect it will provide reassurance to market participants, particularly regarding offerors' obligations in respect of eligible investor certificates — and more generally in that the Court resisted reading obligations into the FMC Act that do not exist in the words of the statute.

In its media release following the judgment, the FMA noted that it "will continue to work with [the Ministry of Business, Innovation and Employment] on the appropriate policy settings for the wholesale investment regime, given the changing distribution methods and nature of wholesale offers." It remains to be seen what this means for the wholesale investor regime, but legislative reform could be on the FMA's agenda.

Please get in touch if you have any questions about the High Court's judgment or the eligible investor exclusion more generally.