When promoting products to wholesale investors, take care with the reach and detail of your advertising because “wholesale” is not synonymous with “sophisticated”.
That was the essence of the High Court decision on 30 June to uphold a Financial Markets Authority (FMA) order requiring property and development company Du Val Group (Du Val) to amend a social media campaign aimed at raising $100m in secured lending at a fixed annual return of 10%.
The case (Du Val Capital Partners Ltd v Financial Markets Authority) illustrates the considerations needed when advertising wholesale investment offers and was the first appeal against an FMA direction order.
The FMA’s direction order
The FMA considered Du Val’s advertising was likely to mislead or deceive potential investors because it included representations that:
- the Mortgage Fund had “the best of both worlds” in that it was secure, suggesting low risk, but would financially outperform bank term deposits. However, the risk associated with early stage finance for a property development project is not low, and
- there were no fees associated with the investment, when in fact the General Partner was entitled to 100% of the profit after the 10% fixed return to investors.
The FMA was also concerned that the widespread online promotion of interests in the Mortgage Fund via social media and other channels would attract inexperienced investors for whom the offer was unsuitable.
Accordingly, in October 2021, the FMA directed Du Val to withdraw the promotional video and refrain in future advertisements for the Mortgage Fund from using various descriptors, including:
- “mortgage-backed security”
- “providing investors with a level of certainty hard to come by in this market”
- “investors' security is registered by way of a mortgage over real assets”
- “investment is secured by registered mortgage”
- “mortgage-backed security in land and bricks & mortar investment”
- “seeking both income and capital security on a capital investment”
- “high security and high return”
- “the best of both worlds in terms of security and return”, and
- “the highest-ranking security that is available on behalf of investors”.
The order also prohibited comparisons between Du Val property development projects and term or bank deposits or other low risk financial products.
Du Val appealed to the High Court.
Who is the audience for the advertising?
When assessing whether advertisements are misleading or deceptive (or likely to mislead or deceive), the Court accepted that the first question was to identify whether the representations were targeted to the general public or to a particular class of persons.
In this case, the use of news websites and social media likely meant that the advertising was seen by both sophisticated and inexperienced investors.
Therefore, the Court held it was not incorrect for the FMA to find that on the basis of the broad marketing approach, the advertising was targeted at a wider spectrum of investors, even though only wholesale investors could ultimately invest.
Who is a wholesale investor?
The Financial Markets Conduct Act 2013 (the Act)1 requires less extensive disclosure to wholesale investors because they are deemed to have sufficient investing experience to not require the same protections that are provided under the Act for a retail investor. A person is a wholesale investor if they fit within one of six categories.
However, the Court held that wholesale investors were not inherently more sophisticated than non-wholesale investors and would have a spectrum of investment experience. Outliers who were “unusually stupid”, “ill-equipped” or “whose reactions are extreme and fanciful” do not need to be taken into account when considering the target audience.
Is a retained profit a “fee”?
The Court found the FMA was entitled to take a broad definition of “fee” to include the General Partner’s right to retain any profit above the investors’ fixed return. Therefore, Du Val could not claim the Mortgage Fund had “no fees”.
When advertising financial products, have a clear picture of your target audience, their level of knowledge, acumen and ability, and also consider those who are likely to see your advertisements. Wholesale investors are not necessarily sophisticated investors.
Even when advertising to wholesale investors, take care that sufficient information has been provided so that claims are not misleading. Don’t rely on being able to clarify statements via a separate information memorandum or other information.
For further information on this topic, read our recent Brief Counsels FMA guidance on financial product advertising and How to avoid greenwashing in financial services advertising.
1 Financial Markets Conduct Act 2013, sch 1, pt 1, cl 3.