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The High Court’s recent case-stated decision that eligible investor certificates must state the grounds for the investors’ certifications, but not detail their experience, is consistent with the plain meaning of the Financial Markets Conduct Act 2013 (FMC Act) and reflects the intentions when the FMC Act was drafted.
Overview of the judgment
The Financial Markets Authority (FMA) had sought clarification on the interpretation of the eligible investor exclusion under the FMC Act, particularly regarding the use of eligible investor certificates in the wholesale investment sector. The FMA initiated proceedings due to concerns that eligible certificates are enabling investors who need FMC Act protections to invest in unregulated offers.
The High Court’s decision affirmed the plain meaning of the legislation. Offerors can rely on eligible investor certificates, except where the certificate is invalid on its face, including when the grounds stated are plainly incapable of supporting that the person has the requisite experience to meet the eligible investor requirements. It is not necessary for the offeror to go further and confirm that the investor has the required experience.
The FMA’s media release stated there may be further “work with MBIE on the appropriate policy settings for the wholesale investment regime”, which may explain why the FMA took a case in the first place.
The High Court addressed four questions posed by the FMA. Our summary of the Court’s answers is set out below.
The investor does not need to set out “sufficient investment experience” in an eligible investor certificate
- An investor is not required to expressly describe their previous experience in acquiring or disposing of financial products, nor to explain how that experience enables them to assess the merits of the transaction, their own information needs or the adequacy of any information provided.
- The investor must simply state grounds that are not, on their face, incapable of supporting the investor’s self-certification.
- The confirmation process conducted by a lawyer, accountant or financial adviser remains crucial. If the grounds stated are “thin”, the onus is on the confirmer to seek further information or conduct further enquiries. The decision emphasised that confirmation is a fundamental aspect of the eligible investor exclusion.
- If the grounds provided are plainly incapable of supporting the certification (for example, the ‘tongue-in-cheek’ example given in the case: “I used to be a trapeze artist”), then the certificate will be invalid, even if otherwise confirmed.
- While the FMA suggested that offerors should assess the quality of the investment experience, the Court disagreed. It held that an offeror need only be satisfied that the certificate is valid (i.e. that the formal requirements are met, which includes stating some grounds). However, if an offeror is aware that the investor does not, in fact, have the requisite experience, the eligible investor certificate cannot be relied upon.
The offeror needs to be satisfied that an eligible investor certificate is valid, but not confirm that the investor is able to make the necessary self-certifications
Offerors must be satisfied that an eligible investor certificate is valid (i.e. that the formal requirements are met, including that some grounds are stated). The FMA and the intervenors agreed on this point. However, the Court rejected the FMA’s submission that offerors have an implied obligation to ensure that the grounds set out by an investor are satisfactory. In reviewing the legislative history of the relevant provisions, the Court found that there was nothing to suggest that such an implied obligation exists for offerors.
An offeror does not need to seek information not contained in an eligible investor certificate
Given the Court’s answer to the second question, the third did not arise for consideration. Nevertheless, for completeness, the Court noted that in assessing validity of an eligible investor certificate, an offeror is confined to the information contained within the certificate itself. Reliance on information outside the certificate is not part of the statutory scheme for determining validity.
An offeror must make disclosure where it cannot rely on an eligible investor certificate and no other exclusions apply
If an offeror cannot rely on the eligible investor certificate (and the investor does not otherwise qualify as a wholesale investor), full disclosure is required under Part 3 of the FMC Act. This serves as a useful reminder that:
- if any investor is regarded as a retail investor, rather than a wholesale investor, the entire offer may be treated as a regulated offer, necessitating full disclosure.
- investors may still qualify as wholesale investors under the other limbs of clause 3 of the FMC Act, even without certification.
Our thoughts
In this judgment, the Court adopted the plain meaning of the legislation, which was consistent with the FMC Act’s history. The FMA’s arguments attempted to introduce additional obligations on offerors beyond those set out in the FMC Act based on a purposive interpretation of the Act. The Court’s decision should be reassuring for offerors and their advisers, as it provides greater certainty for the use of eligible investor certificates.
From a practical perspective, this decision does not introduce additional best practice standards for offerors, who may continue to rely on valid certificates. However, a key challenge arising from the decision is the explanation of the offeror’s role in relation to eligible investor certificates. The Court states that if a confirmation is given based on grounds that clearly cannot support the investor’s certification, it should be apparent to offerors (on the face of the certificate) that the formal requirements for confirmation have not, and cannot, be met. In such cases, the confirmer would have required more information before making the certification.
Although the decision purports to reaffirm that offerors need not look beyond the contents of the certificate, in practice, we consider that offerors must assess whether the grounds stated in the certificate are relevant to the particular offer. The decision makes clear that it is insufficient to rely on a confirmation where the stated grounds are plainly deficient.
In some instances, assessing the sufficiency of the grounds may be straightforward, but it is easy to envisage situations where this assessment becomes more complex. In such cases, the burden falls on the offeror, as the risk of liability for getting it wrong (i.e. making an offer to someone who is not an eligible investor, nor wholesale investor more generally) rests with the offeror - not with the confirmer nor with the investor. For example, applying the “plainly deficient” test, we can see an argument that an eligible investor certificate which stated “we have other investments and one of our investments fell due” would not be plainly deficient, as these would appear to be exactly the sort of “thin” grounds that would require further scrutiny by a confirmer, but there is a logical nexus between having other investments and being able to meet the requirements to provide an eligible investor certificate. However, the judge was not satisfied that this would be grounds that would support an eligible investor certificate, and included these grounds in the same category as trapeze artistry or previously owning a rental property.
The decision highlights broader policy questions raised by the FMA regarding the eligible investor exclusion. As the Court has pointed out, such policy matters are for Parliament, not the judiciary. Much of the information required in an eligible investor certificate is prescribed by regulation; if these requirements are deemed insufficient, the Government has the ability to introduce further requirements by regulation. Offerors should therefore remain alert to the possibility of future changes in this area.
Finally, it is noteworthy that the Judge observed, when rejecting introducing an obligation on offerors to ensure investors’ grounds are sufficient, that investor protection is not the only purpose of the legislation and so too is the confident participation of businesses in the financial markets, and avoidance of unnecessary compliance costs.
Please contact our experts if you would like further advice on how the eligible investor regime applies to you.
Our thanks to Bill Caldwell for writing this note.
