Eligible Investor Exemption
In light of the Du Val insolvency
The recent interim receivership and subsequent statutory management of the Du Val Group has brought the use of, and reliance on, ‘eligible investor’ certifications under the Financial Markets Conduct Act 2013 (FMCA) back into the public spotlight. In this article we discuss this exemption and provide insights to market participants on best practice.
The FMCA
The FMCA is the legislative mechanism for the regulation of New Zealand’s financial markets. It prescribes a comprehensive disclosure regime in relation to offers of financial products. Financial products include, but are not limited to, debt and equity securities, and managed investment products.
Wholesale investors
An investor may be classified as a retail investor or a wholesale investor. While there is an extensive list within the wholesale investor exemptions, relevant examples include:
• Participants who invest a minimum of $750,000 into a single investment
• Those who are considered ‘large’, as in they hold net assets or have consolidated turnover of at least $5 million
• Government agencies, and
• Investors who meet certain investment activity criteria, for example, they own a financial products portfolio of at least $1 million in value.
Wholesale investors have access to a broader range of investment opportunities than those available to the general public. Public offers are subject to significant disclosure requirements, statutory oversight and compliance costs.
To counter this, fewer consumer protections exist for wholesale investors.
The ‘eligible investor’ exemption
Under the umbrella of wholesale investors is the ‘eligible investor’ subset; this allows experienced investors who possess the skill and judgement necessary to assess the merits of a transaction, without full statutory disclosure, to be deemed a wholesale investor.
This rationale is reflected in the criteria used to determine who qualifies as an eligible investor. An investor may be eligible where their prior experience allows them to assess a transaction’s merits, their own information needs and the adequacy of any information provided.
If an investor has the expertise to assess the criteria, they may self-certify that they are an eligible investor. As part of this process, an appropriately qualified financial adviser, accountant or lawyer must confirm the investor has been adequately advised of the consequences of certification. The relevant professional must confirm they have no cause to doubt the certification.
The Du Val Group situation
In October 2022, the Financial Markets Authority (FMA) warned two entities within the Du Val Group that certain investor certificates it was relying upon were incomplete. The FMA cautioned that, within the certificates, the relevant grounds investors were giving ‘did not refer to any previous experience in acquiring or disposing of financial products and so are not capable of supporting the certification and should be disregarded.’
In addition to those 2022 findings, recent media reports have suggested that the Du Val Group continued to market their financial products to retail investors and encouraged them to use the eligible investor category. The report suggested they were not sufficiently experienced or high-net worth individuals for whom the exemption is intended. At the time of writing, it appears these investors are unlikely to receive their investments back in full.
Who should exercise caution?
The Du Val insolvency process is a reminder of the risks involved with financial markets and financial products. Market participants should be fully aware of the risks associated with using the eligible investor exemption:
• Investors must understand fewer regulatory protections are afforded to them within this class. It is, therefore, particularly important that eligible investors are appropriately experienced to allow them to properly assess investment opportunities and associated risks.
• Financial advisers, accountants and lawyers must exercise caution when giving certifications, particularly for investors with whom they have had no previous dealings. The assessment as to whether an investor is sufficiently equipped to transact without the default protections of the FMCA is not an exercise that should be taken lightly, and
• Issuers and offerors relying on eligible investors to raise capital must be careful to correctly classify investors. Encouraging inexperienced investors to proceed as eligible investors does not support an informed or balanced decision and may result in significant penalties.
For more advice on eligible investor status, please don’t hesitate to contact us.
DISCLAIMER: All the information published is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.