High Court clarifies eligible investor certification requirements under the FMCA
The High Court has recently issued a significant judgment clarifying the requirements of the eligible investor certification regime under the Financial Markets Conduct Act 2013 (FMCA).
The decision provides important guidance for offerors, investors, and professionals involved in confirming eligible investor certificates.
Background
The FMCA governs offers of financial products in New Zealand. Under the FMCA, an offer of financial products requires disclosure in the form of a product disclosure statement (PDS) unless one (or more) of the exclusions in Schedule 1 of the FMCA applies.
One of those exclusions is the eligible investor exclusion – this allows investors to self-certify that they have previous experience in acquiring or disposing of financial products, such that they are able to assess the merits of an offer, their own information needs and the adequacy of the information provided without requiring the same level of disclosure that would otherwise be provided in a product disclosure statement.
The investor must set out the grounds for their experience in the certificate, which must then be confirmed by either a financial adviser, qualified statutory accountant or lawyer.
The regime is intended to facilitate capital raising from sophisticated investors – without the full disclosure requirements and compliance costs required for an offer to retail investors.
Over recent years, the Financial Markets Authority (FMA) has had an increasing focus on wholesale issuers, including those relying on the eligible investor exclusion.
Following a thematic review of wholesale investor exclusions more generally, the FMA expressed concern that, in its view, the eligible investor exclusion was being relied on in circumstances which the FMA did not consider appropriate. These concerns included that some certificates either failed to state any grounds for the relevant experience or relied on grounds that did not adequately demonstrate the investor’s experience in investing in financial products.
As a result, the FMA initiated High Court proceedings seeking to clarify the interpretation and use of the eligible investor regime.
Key findings
The High Court confirmed that the eligible investor regime is one of self-certification with the added protection of a confirmation process. The Court’s key findings include:
- Grounds for certification: Certificates must state the grounds for certification, but do not need to include detailed or objectively sufficient evidence of investment experience. Only if the grounds are unstated or, on their face, patently incapable of supporting the investor’s certification will the certificate be invalid.
The Court has also clarified that the assessment of validity must be based solely on the content of the certificate, and that external or additional information that an offeror may know cannot be considered when determining whether the certificate is valid and therefore whether the investor is in fact an eligible investor for the purposes of the FMCA.
- Offeror obligations: Offerors must satisfy themselves that any eligible investor certificate presented to them is a valid certificate (i.e. meets all statutory requirements). This includes confirming that the stated grounds are not obviously deficient.
Offerors are not responsible for assessing the substantive experience of the investor. Specifically, there is no positive duty on the offeror to be satisfied that, based on the grounds set out in the certificate, the investor does in fact have the necessary experience to assess the merits of an offer, their own information needs and the adequacy of the information provided. This finding is consistent with the statutory provisions of the eligible investor regime, which the Court notes was deliberately designed so that an offeror is entitled to rely on a valid eligible investor certificate – as long as the offeror does not have knowledge that the investor does not in fact have the required previous investment experience.
- Role of the confirmer: The confirmation provided by a financial adviser, statutory accountant or lawyer is not a third-party verification of the investor’s experience requiring a positive assessment. The confirmer can confirm a certificate so long as, having considered the investor’s grounds for the certification, they have no reason to believe the certification is incorrect or that further investigation is required as to whether the certificate is incorrect. Confirmers must also ensure the investor understands the consequences of certifying themselves to be a wholesale investor and the potential offence of providing a false certificate.
- Disclosure obligations: If an offeror cannot rely upon a certificate or it is invalid, and the investor does not fit within one of the other exclusions under the FMCA (for example, is not otherwise a wholesale investor), full disclosure under Part 3 of the FMCA is required.
Implications for market participants
The judgment confirms that the eligible investor regime is designed to provide certainty and simplicity, balancing investor protection with the need to facilitate capital raising. However, the Court acknowledged that the confirmation process may have “fallen down” in some instances and that any rebalancing of the regime, or the introduction of further prescribed information that must be included in eligible investor certificates, is a matter for Parliament.
The decision reinforces the importance of ensuring that:
- Certificates include grounds that are not obviously incapable of supporting the certification.
- Confirmers take their role seriously and request further information where appropriate.
- Offerors carefully review certificates for formal statutory compliance and obvious deficiencies.
Looking ahead
The FMA may seek amendments to the FMCA or regulations in light of the expectations reflected in its submissions to the Court.
In the meantime, market participants should ensure robust processes are in place for certification and confirmation, and that they do not rely on certificates that are incomplete or clearly fall short of the required standards.
Want to know more?
If you have any questions about the eligible investor regime or capital raising compliance more generally, please contact our specialist Capital Raising Team.