The High Court’s recent decision provides helpful guidance on how the eligible investor regime under the Financial Markets Conduct Act 2013 (FMCA) should operate. Eligible investors are a sub-category of wholesale investors who self-certify that they have sufficient experience to understand the financial product being offered and therefore do not need certain protections under the FMCA (such as disclosure).

The Financial Market Authority’s (FMA) case stated sought the Court’s opinion on the proper use of eligible investor certificates, including the level of detail that the eligible investor certificates must include and the role of issuers in relation to those certificates. This followed concerns raised by the FMA in its thematic review that offerors of financial products were relying on certificates that lacked sufficient detail or were being confirmed despite clearly inadequate grounds. Our update on the FMA’s thematic review can be found here. 

The Court’s decision took into account submissions made by two industry bodies who intervened to be heard on the case stated, New Zealand Private Capital Association Incorporated and Angel Association New Zealand Incorporated, represented by MinterEllisonRuddWatts.

A link to the judgment is available here. 

Who needs to read this and why? 

Anyone who is involved in the financial industry or deals with wholesale investors, and in particular, any organisation that uses or relies on eligible investor certificates. This will include startups, small vehicles, venture capital and private equity, and other parties seeking private capital. It will also be important to professionals who confirm these certificates. 

What did the Judge find? 

In response to four questions posed by the FMA, the Court held that: 

1. The certificate does not need to explicitly describe the investor’s experience or how it enables them to assess the investment. However, the certificate must include grounds that are not obviously incapable of supporting the certification. Certificates with patently inadequate or no grounds are invalid.
2. The offeror must ensure the certificate is formally valid (i.e., meets all statutory requirements). However, there is no positive duty on the offeror to ensure that the grounds set out by the investor in the certificate are sufficient to demonstrate that they have the necessary experience. This finding is consistent with the wording of the FMCA, which says that an offeror may not rely on an eligible investor certificate if they “knew” that the investor did not in fact have previous experience of the kind required. 
3. Validity must be assessed based solely on the certificate itself, not external information that the offeror might know.
4. Disclosure is required if the offeror cannot rely on the eligible investor certificate and the investor is not otherwise a wholesale investor.

The Court placed particular importance on the requirement that an eligible investor certificate must be confirmed by a financial adviser, qualified statutory accountant, or lawyer. The “confirmer” must not endorse the investor’s certification unless they are satisfied that the investor has been properly informed of the implications of certifying as an eligible investor, and that there is no reason to believe the certification is incorrect or that further inquiry is needed to verify its accuracy. 

Where the grounds stated in the certificate are not clearly incapable of supporting the certification but are nevertheless “thin”, the confirmer may still conclude, after reviewing those grounds, that further information or investigation is warranted. In such cases, the confirmer may seek clarification from the investor and, if satisfied, proceed to confirm the certificate. In that situation, the Court held that an offeror ought to be entitled to proceed on the basis that the confirmer has no reason to believe the certification is incorrect or that any further information or investigation is required. 

The Court reviewed the legislative history of the certification regime in some depth, and concluded that if there is a need to “re-balance” the approach to the eligible investor exclusion, or to prescribe further information which must be included in an eligible investor certificate, that is a matter for Parliament and not the Court.

Our view

This ruling provides helpful clarity that the financial industry can work with. This is consistent with the legislative history of the eligible investor regime, which was designed to provide a measure of certainty to offerors while providing protection via the confirmation of the certificate. This certainty is critical as the risks of making a wholesale offer to an investor who then is found out later to have been a retail investor are severe, as the offer would be deemed to be a “regulated offer” under the FMCA, triggering full disclosure obligations and could expose the offeror to significant penalties and/or enforcement action. This decision preserves the certainty and simplicity of the eligible investor regime, which is crucial for start-ups, private equity, and venture capital industries.

This article was co-authored by Hasaan Malik (Solicitor) from our Litigation and Disputes team.