Thursday, 16 March 2017
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Sophisticated Investors

I was talking at the Australian Shareholders Association once and met a lovely couple who told me that they has been offered the opportunity to invest in a ‘wholesale’ fund where the returns were 'much better' than the retail fund but in order to invest they had to put in $500,000. I asked them if they knew what a sophisticated investor was and they said “No”.

OK, stop right there.

Many of you will know this but clearly some of you don’t. It works like this. You can read this on the ASIC website: “Generally people buying securities and other financial products must, under the Corporations Act 2001, be given a regulated disclosure document such as a prospectus or product disclosure statement. However, the Act has some exemptions from these requirements.”

The exemptions from having to tell you in a legally prescribed manner you what you are buying include things like when someone is selling something worth less than $2 million to less than twenty people or, the most common exemption, when someone qualifies as a ‘sophisticated investor’ under s.708 of the Corporations Act. In broking we call them s.708 clients.

They are clients who are deemed by law to be financially sophisticated enough to rely on their own advice, so we can pretty much sell you anything and you can’t sue us because the law has decided that if you are that rich you do not need the protections of a regulated disclosure document. We can’t lie to you, but we can advise you to buy something without the same manacles put on us when we are giving personal advice to a non-sophisticated investor. Most notably we don't have to have a reasonable basis for our recommendation and we don't have to take your personal financial circumstances into consideration. You can sell any financial product you like to a wholesale investor and the licensing requirements to do so are far less onerous. To sell products to a retail investor (anyone who is not a sophisticated investor) requires a retail license which is harder to get. are a number of ways to qualify as a s.708 client but there are two common ones. The first is that you present a current certificate (they last for two years) from a qualified accountant certifying that you have prescribed net assets of $2.5 million or a gross income level of $250,000 or more per annum in each of the previous two years. Click here for more

The second under s.708(8)(a) is if “the minimum amount payable for the securities on acceptance of the offer by the person to whom the offer is made is at least $500,000”. 

In other words if you buy $500,000 or more of a product it is implied that you are a sophisticated or ‘wholesale’ investor. In which case you again have to rely on your own advice. 

That is why my AIA couple were asked to invest $500,000 in this product, because that rendered them ‘wholesale’ investors (as opposed to retail investors). 

This is why you will find some brokers and fund managers can only offer their services to “wholesale” clients, clients that qualify as sophisticated investors on the above criteria, because they haven’t qualified for a license to sell to retail clients.

So when my delightful couple at the Australian Shareholders Association conference report that they have been told they ‘have to’ buy $500,000 of this fund, what they have slightly unwittingly been offered is a ‘wholesale’ product, a product that does not have a ‘regulated disclosure document’ and if it goes wrong they are going to have no-one to sue because they were deemed to be sophisticated enough to evaluate the product without advice and are instead operating under the core principles of caveat emptor, buyer beware, rather than under the protection of the Corporations Law.

I’m sure they would have picked all that up if they got to the point of reading and signing the paperwork. But maybe not.


 It is an essential bureaucratic short cut that allows companies to raise capital in short periods (quickly) at a bearable cost. If every deal had to be done through a product disclosure statement over months (with the expense of lawyers, investment bankers and printers), the largest listed companies would be corporate law firms, investment banks and printing companies.

The share market exists to raise capital, it is simply a conduit for capital to pass between investors and investments. When more risky ventures find the banks unwilling, the share market steps in and offers it to the hoards of retail and wholesale (institutional) investors, and if it is really risky the s.708 or ‘sophisticated’ and wholesale investors take it on. It is a mechanism that allows companies and investors to voluntarily take themselves outside the disclosure requirements to speed the process.

S.708 is not there to unprotect unsophisticated investors, it is there to protect unsophisticated investors, by stopping the more risky stuff being offered to them.

The only issue here is that when a wealthy unsophisticated investor buys $500,000 worth of securities they might inadvertently find themselves being labelled as a sophisticated investor, in which case they lose some of their protections.

CAVEAT EMPTOR you are asked by a broker if you want to join their select group of s.708 clients, it is not flattery, it is because the broker will be able to offer you literally ‘exclusive’ share market deals that they are not allowed to offer to the unsophisticated investor, a process that often enrages the excluded unsophisticated masses.

Its also important to note that you don’t have to qualify as a s.708 client even if you can, many clients deliberately don’t, so they remain protected, and if you do qualify you don’t have to buy anything

But if you do decide to join the throng of Australian s.708 sophisticated investors it would help if you were actually financially sophisticated, rather than just meeting the criteria for being declared financially sophisticated under the Act.

For most of you requests for capital manifest themselves as an IPO, or a company share purchase plan but this is just the very boring plain vanilla tip of the stock market iceberg. Whilst you are reading product disclosure statements on Medibank and ponderously deciding whether to buy $15,000 worth of stock, in the corridors of the stock brokers there is a frenzy of sophisticated and wholesale (institutional) investor activity going on. Literally hundreds of share placements are being put away every year, the bulk of which you will only hear about in a public announcements after the placement is completed, had no prospectus and went to the sophisticated and wholesale clients of whichever broker handled the deal.

I used to work for Patersons Securities. Between 2000 and 2011 Patersons had marketing material that boasted that they had raised in excess of $6.6bn in 760 issues the bulk of which did not require a PDS and many of which were placed with the sophisticated client bases of their full service advisers. It’s a key part of what a full-service broker offers over the rest of the online brokers and online dealing platforms. Sure CommSec and the like are involved in a few IPOS but they are not offering "Private Placements' as the full service brokers do, often at unrefusable discounts to the current market price.

By becoming a sophisticated investor and putting your name down on the sophisticated investor register of your friendly neighbourhood broker you make yourself available for things like accelerated placements (which have become commonplace and annoyingly favour wholesale clients over the existing shareholders), and most hybrid issues from mainstream top 100 companies. Many of those do not have product disclosure statements and are only available to you within this structure.

Sophisticated or wholesale placements do require you to have a certain strength of mind. They often come without paperwork, in a rush and on the phone, with a broker demanding an answer “now, before it’s all gone”. But before you trust that phone call, understand, that brokers earn commissions on the placements, often large commissions, zero to 12%, and the higher the commission the harder it is to sell and the more cautious you need to be. 

Your adviser is balancing commission versus your welfare and if you’re not buddies, watch out. The good news is that they do have to disclose their commission to you, so ask. If its 12% you know what’s going to happen.

So it’s not all roses. When the only qualifying criteria is that you are rich, your sophisticated investor moniker can make you more of a target than a champion and in order to qualify for the best placements and be protected from the bad ones you are going to need a good (regular) rather than simply ‘sophisticated’ (cherry picking) relationship with your broker. Without that you are going to be at the bottom of the list for the good ones and at the top of the list for the bad ones. It’s the Golden Rule of the stock market. If it’s any good you won’t get offered it. If you get offered it, you don’t want it

But good or bad, being a sophisticated investor is a free option on getting offered financial opportunities. So what’s the catch you ask? It’s pretty obvious really. You may qualify as a sophisticated investor but are you qualified to be a sophisticated investor. Caveat Emptor. That’s the catch. You may not be smart enough to separate the good from the bad and you may not have the presence of mind to ignore that pushy phone call offering you 'free money'. 

“Sophisticated investors (see definition below) are people who have a level of wealth and or expertise in the market that excuses the seller of a financial product from the regulatory duty of care. Sophisticated investors are deemed to be smart enough or big enough to look after themselves. Someone with savoir-faire”.

That's the description but in many cases, it’s a laughing matter and a trap. Just because you have convinced a broker that you are a sophisticated investor doesn’t mean you are sophisticated. It simply means you are part of a class of investor that can be sold stuff without liability and without the usual disclosures that would be required in a prospectus. Qualifying as a sophisticated investor says you do not need regulatory protection. It puts you on a list of people that sellers (brokers) can “distribute” placements to, private placements, pre-IPO placements. Placements that don’t get offered generally. Placements that don’t even have to be offered to shareholders.

Sometimes this is a privilege. And sometimes a liability. If your relationship with the offeror (the broker calling you) is not top notch, that is to say you are not “trusting friends” then I’m afraid you are “fodder”. And you know what that means – you are on your own.

As usual in sales and making money, it’s all down to the relationship. Being a sophisticated investor without a trusting relationship with the seller (broker), gives product sellers a right to roger you, with impunity. So be sophisticated about it.  

Bottom line. If you ask questions, demand details, hold people to account, turn most things down and trust no-one you might survive. 

There is a joke on the broking desks, anyone who takes every carrot they are offered, is a bunny.

Famous recent Sophisticated Investor disaster was Guvera offered by co-founders Claes Loberg and Darren Herft. Guvera raised $180 million from 3,000 mostly self-managed superannuation funds and was hoping to raise another $100 million in an IPO that was blocked by the ASX (a very rare use of their discretion). One investor has since tried to wind up the company over a debt of $1.78m.  

Read about it here

The Australian wrote a good article on Sophisticated Investors last year in the wake of Guvera. In that they published a checklist for sopohisticated investors being offered something:

  • Can you afford to lose the capital you are putting up — all of it?
  • Is a broker, property developer or investment spruiker strongly encouraging you to get involved in an investment with “sophisticated” status? Be wary of anyone trying to pressure you into getting a certificate.
  • Do you have experience with the asset class on offer? Is it something that you would choose if available to retail-only clients?
  • Are you comfortable knowing there may not be a dispute resolution process in place in the event that you need it?
  • Do you have a financial ­adviser to run a second set of eyes over the opportunity?

For the full article click here



If you wish to be offered these private placements you need to get on the broker’s list of s.708 sophisticated investors. Ask your broker if they have a sophisticated investor program. You can be on the list for a number of brokers or planners, not just one. The more the better (?). To get on it they will send you a form to fill out most of which will require your accountant’s signature to say you meet the requirements.


If you meet any of the requirements set out by ASIC you can consider yourself a Sophisticated Investor (or section 708 investor under the Corps Act) although to participate in offers to sophisticated investors you will need to prove that to the offeror (usually a stockbroker) with this certificate.

Click on this link to see if you qualify as a Sophisticated Investor. 


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This is off the ASIC website – It is a write up on share placements to retail investors. It includes the criteria for being a sophisticated investor. 

Companies these days quite frequently sell additional shares to raise money through 'share placements'. These are offered only to institutions and sophisticated investors. Companies may invite existing retail shareholders to top up their holdings, but only up to $5,000.

Read why:

Share placements allow a company to raise up to 15% of their current capital base:

  • without seeking shareholder approval and
  • without going to the trouble and cost of a formal prospectus.

The company often uses the money it raises in a placement to take over a new business or to significantly expand the company's activities.

In the past, companies have sometimes struggled to raise money through the traditional offer of rights to subscribe for more shares, called a 'rights issue'. They often had to pay underwriters sizeable fees to make up for any shortfall in the money raised this way.

As the Australian market has grown, companies have found institutional and sophisticated investors willing to come up with extra capital, often in large amounts, within 24 hours. Generally, institutional and sophisticated investors invest at least $500,000.

Many companies believe the speed and cost savings make placements a better choice than a traditional rights issue.

Investor protection

The Corporations Act distinguishes between investors who need protection (through a regulated disclosure document) and those who do not.

Parliament considered it necessary to have 'prospectus quality' information for retail shareholders. A full prospectus must contain all the information these investors or their advisers need to decide if the investment suits them. Information of this quality costs time and money to prepare. To prepare a prospectus often requires planning some months in advance.

On the other hand, institutional and sophisticated investors are assumed to have the ability and resources to:

  • analyse market announcements and financial information and
  • make up their minds quickly.

In a placement, institutions get only limited information from the company, and they must make snap decisions over large amounts of money. That's not so easy as it sounds, and even institutions can make mistakes. For example, if the placement is helping pay for a takeover, the new business may prove far less profitable than originally expected, causing the company's share price to fall.

To reduce their risk, institutional investors usually seek a 'discount' to the current market price of the company's shares in case the market price falls after the placement is completed.

Top ups

ASIC allows companies to invite their existing retail shareholders to top up their holdings, without a full prospectus, on two conditions. The offer may be made:

  • for a maximum of $5,000 per shareholder on top of their existing shares, and
  • only to existing shareholders in listed companies.

The $5,000 limit reduces the risk, compared with a higher amount that would make a decision to invest extra money much more significant for most people. Existing shareholders may know more than newcomers, and listed companies must keep the market up to date.

Also, many companies have large numbers of shareholders with very small, often unmarketable parcels of shares. A top up plan encourages people with very small holdings parcels to build up a marketable parcel cheaply.

Are you a Sophisticated Investor?

Sophisticated Investors do not require a disclosure document to accompany an investment offer.

Sophisticated investors, as defined by Corporations Law are individual entities in respect of whom a qualified accountant has given a certificate in the last six months confirming that:

  • the individual entity either has net assets of at least A$2.5 million, or
  • has a gross annual income (for each of the last 2 financial years), of at least A$250,000.


  • Individual entities who subscribe for and are allocated at least A$500,000 worth of the securities being offered


  • Individual entities who control for the purpose of investment in securities (that is, shares, debentures, units in managed funds - not property), at least A$10,000,000.


  • Individual entities who are licensed dealers subscribing for the securities as principal.

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