Is it just me or are there are lot of small unregulated offerings around lately? By unregulated offerings I mean those that do not require a formal offer document such as a prospectus or a product disclosure statement (PDS).
Unregulated offerings include offerings where the minimum subscription is $500,000, offerings to people whose accountant has certified they have regular annual income over $250,000 or net assets of $2.5 million (so-called sophisticated investors), offerings to professional players in the investment arena (so-called professional investors) and personal offerings where a maximum 20 people take up a maximum $2 million in any 12-month period (the so-called 20/12 exclusion).
It is interesting to note in passing that these exclusions are separate and could be used together to raise a very significant sum. That is, the issuer can raise up to $2 million under the 20/12 exclusion and then substantial further amounts under any of the other exclusions. If the issuer can rely on other exclusions then there is effectively no limit on the amount that can be raised under an unregulated offering.
You would think that with interest rates historically low (still, despite the recent increases) people wanting capital would just borrow it. But to grant access to those low rates most lenders still require real estate security and personal guarantees. For clients without that security, or who don't want to risk it or give the guarantee, better informed accountants and business advisers have been recommending that money be raised from private investors who could be accessed via an unregulated offering.
Business start-ups, business expansions, share investment syndicates and of course small property development syndicates have been the main users of unregulated offerings. I seem to recall that encouraging those offerings by making it easier for them to comply with the law was one of the goals of the Corporations Law simplification process we've seen over the past five years or so. If that's right then I would say it is working.
And interestingly enough I don't see any of these offerings on the front page of the financial papers as in the case of Westpoint. Is that because the numbers of people involved and the amount of money at risk is significantly less or is it at least partially because the less strict compliance obligations for smaller offerings have not produced a higher number of failures or scams?
So what does a planner have to think about if their client brings them one of these offerings seeking their advice or if one of the local accountants asks for support in finding potential investors?
The first and easiest consideration for the planner is whether their Australian financial services (AFS) licensee will allow them to recommend such a product. If the licensee has a specific authorised investments list then the planner must either have the product put on that list (unlikely in the case of a large licensee but possible for small licensees) or sadly decline to be able to be involved in any recommendation of the product.
Many licensees are now designating their authorised investments not so much by detailed lists but rather by product criteria, which could potentially enable a planner to argue that the offering is authorised.
Of course, the lower compliance requirements for these offerings do not necessarily mean the offerings are completely unregulated. And it is important to distinguish between the rules relating to the issue of those offerings and the rules relating to the selling of them.
Regardless of whether the investment on offer is in securities (shares and debentures), in which case section 708 of the Corporations Act applies, or in financial products that are not securities such as managed investment schemes, in which case section 1012E is the relevant provision, if the offer is excluded then no formal document need be issued. The statutory requirements relating to the content of such formal documents are therefore not relevant.
Several more general prohibitions continue to apply, though. A person must not engage in conduct in relation to a financial product that is misleading or deceptive or likely to mislead or deceive (section 1041H). This is obviously a mirror section to section 52 of the Trade Practices Act, which applies to all businesses. Because the Australian Competition and Consumer Commission (ACCC) has vacated the field of corporate and securities regulation in favour of ASIC, it was obviously felt necessary to repeat the prohibition in the Corporations Act in this way.
Court decisions in relation to s52 have interpreted the section very widely and in a whole raft of different areas covering a multiplicity of actions by defendants. Any material error in, or omission from, an unregulated offer document would almost certainly breach the prohibition in s1041H.
And let's not forget the common law. Just because the Corporations Act contains this prohibition does not mean the common law has no effect. Common law claims under the tort (civil wrong) of misrepresentation and for negligent misstatement (to name only two) would continue to apply and continue to give investors grounds for suit against issuers of unregulated offers.
These potential claims effectively mean that issuers of unregulated offerings should take the same amount of care as they would if their offer document was regulated. The same rigorous due diligence should be done in respect of unregulated offerings as would be done if they were regulated; perhaps even more rigorous given that, unlike a registered prospectus or PDS, ASIC will only see the document if there is a complaint. Copies of all documents that support statements in the offer document should be compiled and retained in case of query by regulator or unhappy investor.
Other advising obligations imposed by the Corporations Act are not precluded simply because the offer itself is excluded. The excluded offer remains a financial product and any advice concerning it that is intended to influence a person to make a decision regarding it is financial product advice that should only be provided by a person who holds an AFS licence or is authorised by a licensee. Likewise, obligations to issue a financial services guide, to have a reasonable basis for making the recommendation to invest and to issue a statement of advice continue to apply.
Issuers of the investment and accountants need to keep these requirements in mind. Both may promulgate the offer document but not make any recommendation or statement of opinion, whether personal or general, in respect of the product unless they are duly licensed.
