The Financial Markets Authority (FMA) announced that it has issued a warning to HP Capital Limited, trading as Finbase, for serious breaches of the Financial Markets Conduct Act 2013 (FMCA) and the Financial Markets Conduct Regulations 2014 (FMCR).
The breaches relate to failures in meeting disclosure and notice obligations due to misapplication of the Wholesale Investor and Small Offer exemptions, as well as breaches of the fair dealing provisions.
A link to the FMA’s media release is available here.
Who needs to read it? Why?
This warning offers important clarification on how the wholesale investor exemption should be interpreted in relation to the $750,000 threshold. Issuers relying on this limb of the wholesale investor definition should be aware of this.
Additionally, this warning is relevant to all providers making wholesale offers, with the FMA specifically calling out that fair dealing in relation to wholesale offers is a particular focus for the FMA this year.
What does it cover?
The FMA found that Finbase breached the Wholesale Investor and Small Offer exemptions by exceeding the $2 million limit under the small offers exemption and failing to meet the $750,000 payment threshold required for wholesale investor classification. Some investors had not paid $750,000 either upfront or cumulatively for similar products at the time of offer acceptance, resulting in regulated offers being made without proper disclosure under Part 3 of the FMCA.
Finbase were also found to have breached fair dealing provisions under Part 2 of the FMCA by advertising its Single Investment products in mainstream publications and via sponsored AdWords using terms like “term deposit” and “low risk investment NZ.” These ads misled the public into believing the products were suitable for low-risk investors and failed to clarify that the products were available only to wholesale investors.
Importantly, the warning confirms that, under the wholesale investor exclusion based on the $750,000 investment threshold, the FMA interprets “payable” to mean actual payment in full must be made at the time the offer is accepted.
The warning also serves as a broader reminder to all providers making wholesale offers, with the FMA stating:
“This warning demonstrates the importance of issuers correctly using and applying the regulated offer exclusions if they want to ensure their offer does not become a retail offer. It also emphasises the need for issuers to take considerable care with the way they advertise an offer to prevent potential investors from being misled about the nature, characteristics and suitability of a financial product.”
Our view
This warning confirms the FMA’s interpretation of the minimum subscription exemption under the FMCA, that the $750,000 minimum must be paid in full at the time the offer is accepted, and means, for example, that an investment commitment to be paid by later drawdown notices or calls will not be sufficient under this exemption.
This is a narrower interpretation of the word “payable” which it could be argued would be satisfied by an unconditional obligation to pay. However, the approach is consistent with prior case law on the equivalent exemption under the former Securities Act 1978.
The warning also illustrates the FMA’s willingness to use the fair dealing rules to address situations where they consider that issuers are not using the wholesale exemptions responsibly.
For example, although there is no statutory rule which requires an advertisement in relation to a wholesale offer of financial products to state “This offer is only available to wholesale investors” (or an equivalent), the FMA is clearly signalling that failing to do so may lead them to the view that you are misleading the public as to the nature or suitability of the offer.
It is important for offerors to be aware of FMA expectations even if not explicitly set out in the FMCA.
What next?
If you have any questions about the implications of this warning for your business activities, please contact one of our experts.
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