High Court confirms law on Eligible Investor Certificates
Key Takeaways for Offerors
- Start-ups, angel groups, venture capital funds, property funds, and private equity funds now know where they stand when accepting investment from eligible investors under the Financial Markets Conduct Act 2013 (FMCA).
- Certificates do not need to describe the previous experience of the investor, or how that experience helps the investor assess the investment opportunity.
- Offerors do not have a positive duty to explore the investor’s experience beyond the grounds stated in the certificate, provided that some grounds are included, and they are not obviously deficient.
- To be valid, the certificate must still meet the formal statutory requirements (see paragraph 76 of the judgment for a helpful summary of these).
- Now is a good time to check that your offer documents and processes are compliant when accepting investment from eligible investors. Offerors with high quality systems will likely not need to make changes following the judgment but a review is sensible.
- The FMA do like to see offerors build a degree of objective challenge into their systems, to mitigate the risk that offers are made to retail investors inadvertently. It is still best practice to do that notwithstanding the judgment.
Key Takeaways for Advisors
- Lawyers, accountants and financial advisors should take care when confirming certificates. The judgment highlights that the confirmation process is a critical part of the regime and, in some cases, is not currently being done well.
- Advisors must ensure the investor has been sufficiently advised of the consequences of certification, amongst other steps. From a risk management perspective, this exercise may need input from more than one professional advisor (notwithstanding that the FMCA only requires one advisor to provide confirmation).
- Now is a good time to ensure that you understand the legal requirements expected of you when confirming eligible investor certificates. Large firms should have a policy and appropriate risk management measures in place.
- As a minimum, advisors should have a letter of engagement in place before confirming the contents of a certificate. There is risk of negligence claims by the investor, and statutory liability under the FMCA.
Background
Under the FMCA, offers of financial products to the public generally require full disclosure, typically via a product disclosure statement. However, offers made to wholesale investors are exempt from these requirements.
One pathway to wholesale status is through self-certification as an eligible investor, supported by a written confirmation from a lawyer, accountant, or financial adviser in the form of an eligible investor certificate.
In recent years, the FMA has been concerned with misuse of the eligible investor pathway. This concern caused the regulator to seek judicial clarification on the interpretation of clause 41 of Schedule 1 of the FMCA, which governs the use of eligible investor certificates.
The Judgment
The High Court’s decision confirmed that:
- Certificates do not need to describe the previous experience of the investor, or how that experience helps them assess the products offered.
- There is no positive duty on the offeror to explore the investor’s experience beyond the grounds stated in the certificate, provided that some grounds are included, and they are not obviously deficient.
- To be valid, the certificate must still meet the formal statutory requirements (summarised in para 76 of the judgment).
- If a certificate is invalid and the investor is not otherwise a wholesale investor, the offer must comply with the retail disclosure obligations under Part 3 of the FMCA.
- Professional advisors that provide third-party confirmation play a critical role in balancing the risks under the regime. Advisors are required to meet the requirements in clause 43 of Schedule of the FMCA.
- Advisors must not confirm the certificate unless they are satisfied that the investor has been sufficiently advised of the consequences of the certification, and that there is no reason to believe the certification is incorrect or that further inquiry is needed to verify its accuracy.
Special thanks to Partner Gareth Clendinning for preparing this article.
For guidance on eligible investor certificates or any aspect of compliance with the latest High Court decision, our corporate and commercial lawyers are here to help.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
