Establishing wholesale investor status will be a much more onerous process if the Financial Markets Authority (FMA) makes legal ground in an unusual test case filed at the back-end of 2024.
If the High Court backs the FMA position on determining the validity of ‘eligible investor’ certificates, wholesale product offerors would face much tougher due diligence obligations.
The regulator is seeking judicial support for its view that self-produced eligible investor declarations – valid if endorsed by lawyers, accountants, financial advisers and other relevant professionals – include more in-depth information than typically provided in current documents.
In particular, the FMA insists that such self-declared tickets to wholesale investments cover the “previous experience” of those individuals in dealing in financial products and how that relates to the specific transaction under consideration.
The regulator stands at odds with the assumed wholesale investment industry point-of-view that the court filing says only requires investors to “certify they have experience in acquiring and disposing of financial products”.
Furthermore, the notional wholesale investment offeror objects to carrying out any review of eligible investor certificates, according to the case file that summarises the industry position as:
“An offeror is not required to undertake any inquiries, and is able to rely on the experience of the accountant, lawyer or financial advisor who, having considered the grounds for certification, confirmed the certification.”
Despite attempting to rope in one firm (designated as ‘Offeror A’) to represent the opposing case, the FMA – in the absence of a “readily identifiable industry body” – summarised the counterpoints itself.
“The position is intentionally set out in simplistic terms for now, as it is intended only to show to the Court that a contrary position exists giving the need for the Court’s opinion.”
While the law includes several definitions of ‘wholesale’, the eligible investor certification is perhaps the most problematic pathway as highlighted in the FMA ‘thematic review’ of the sector in 2022.
The 2022 review, and a handful of regulatory run-ins with wholesale providers (notably, the now in-liquidation Du Val empire), has brought the legal grey area into sharp focus. NZ’s lax wholesale investment regime also sparked comment from the International Monetary Fund in its country assessment more than a decade ago.
However, some wholesale providers – including the mysterious ‘Offeror A’ – have kicked back against the FMA post-review interpretation of the eligible investor regime.
And lawyers too.
For example, MinterEllisonRuddsWatts noted in 2022: “The guidance does, however, find the FMA pushing up against the intentions of the legislators, which were at least in part to allow issuers easier access to capital by providing for self-certification rather than expecting issuers to vet investor’s qualifications.”
The FMA filing – signed by head of enforcement, Margot Gatland – says “entities” with an interest in the case “and any contradictor appointed by the Court, may also wish to be heard and file submissions” as the case proceeds.