Q: From time to time I come across an investment opportunity that looks interesting but it is only open to sophisticated investors. How do I know if I am a sophisticated investor?
A: The Corporations Law requires that people buying financial products must be given a disclosure document, such as a prospectus or product disclosure statement, that explains the details of the product, its risks and the background of the entity offering it.
However, a prospectus or PDS is not required where the offer is being made to sophisticated investors.
To be counted as a sophisticated investor you must have a current certificate from a qualified accountant certifying that you meet prescribed asset and income criteria.
Your gross income must have been $250,000 or more in each of the past two years, or you must have net assets of at latest $2.5 million.
You can include the net assets or gross income of a company you control but not the income or assets of a trust your company acts as trustee for. The accountant’s certificate remains valid for two years.
The regulatory view is that if you meet one of those criteria you are more likely to be able to evaluate offers of securities and financial products without needing the protection of a regulated disclosure document.
There has been plenty of debate about that proposition and we may eventually move to a different system for distinguishing sophisticated investors. But for the time being, those are the rules.
Being a sophisticated means you have access to a wider range of investment opportunities. You might, for example, be invited to invest in a company that is yet to make its initial public offering.
Such opportunities may be offered at a price that is better than the “retail” price offered through a prospectus.
You might also be invited to invest in products that are more complex than standard financial products, employing options and other derivatives, where the returns but also the risks are higher.
On the negative side, you have fewer protections. Without the regulated disclosure you may not be made aware of all the risks involved in the financial product you are being offered.
Another potential problem is that you may not have access to an external dispute resolution service, such as the Australian Financial Complaints Authority, if something goes wrong.