ASIC warns accountants

ASIC is taking a closer look at investment deals that circumvent the sophisticated investor test.

Securities regulator ASIC is scrutinising investment deals that circumvent the sophisticated investor test.

The Australian Securities and Investments Commission (ASIC) has warned accountants they may be harming ordinary investors if they help them skirt the sophisticated investor test. 

The crackdown comes after some accountants used trust or company structures to allow retail investors to buy shares in music sharing platform Guvera and the failed video streaming start-up, Kwickie International. 

Who is a ‘sophisticated investor’?

As a general rule, when companies raise money from retail investors they are required to provide them with sufficient information to make an informed decision, such as a prospectus or other appropriate disclosure documents. However, these provisions do not apply to “sophisticated investors”, who are classified as having net assets of at least $2.5 million or a gross income in excess of $250,000 per annum in each of the previous two years. 

However, in recent fundraisings for Guvera and Kwickie, ASIC alleges that some accountants signed certificates declaring that they personally – or their firm – is a sophisticated investor and buying the shares in those companies as a trustee for their client, thus purporting to allow investors who are not 'sophisticated investors' to receive offers to purchase shares without a prospectus or other disclosure document. ASIC expressed concern that this fundraising method could be used “in order to circumvent the prohibition on offering shares to non-sophisticated investors without a disclosure document”. 

The regulator took action in July 2017 against such structuring, warning accountants that they ‘may be harming retail investors by inappropriately providing 'sophisticated investor' certificates’.

To put any doubt to rest on whether such an approach was effective, ASIC made a declaration that shares in tech start-up Kwickie should not be offered to “mum-and-dad” investors through a trust structure.

“ASIC took the action in relation to Kwickie for the avoidance of doubt, rather than because there is definitely a loophole in the law,” ASIC advised in a formal statement. 

“ASIC will continue to monitor any reports we receive about possible misuse of the ‘sophisticated investor’ exception to fundraising because it is important that retail investors are afforded the protections provided to them under the [Corporations] Act.”

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Use of trust structures

The ASX blocked Guvera’s plan to list just days before it was to debut and less than 24 hours after ASIC approved a revised prospectus, following public concerns that it had high debts, low revenue and had lost $81 million. 

Darren Herft, a co-founder of Guvera, was also a director and co-owner of AMMA. The Australian arm of Guvera was placed into administration last year. Herft was also a director of Kwickie International, which according to reports raised money through AMMA

ASIC believes shares in Guvera and Kwickie were sold by an authorised representative (AR) of an Australian financial services licensee that sourced investors through a network of accountants.

Outlining how such schemes work, it says accountants are invited to attend conferences hosted by the AR in various locations in Australia and overseas, who in in turn refer clients to information sessions hosted by the AR. 

Should any clients express interest in investing in the companies, the accountant will sign a certificate declaring that they personally – or their firm – is a sophisticated investor and buying the shares as a trustee for the client. 

Notably, the accountant also receives bonus shares in the company, such as one share for every 10 that are eventually sold.

A question of ethics

Michael Davison, senior policy adviser – Superannuation, at CPA Australia, reminds members about their obligations not to accept soft dollar benefits and undeclared payments when providing financial planning services.

The Accounting Professional and Ethical Standards Board standard covering financial planning services (APES 230) states that members can only accept a soft dollar benefit which is “trivial and insignificant” and cannot receive third-party payments without full disclosure and consent of the client.  

“If a member receives a third-party payment through the provision of shares, it must be clearly disclosed to the client upfront and the client must agree to that payment.” Davison says.

“The message to our members providing financial planning advice is if there’s any third-party remuneration, they have to fully disclose it and have it agreed by the client. Further, members cannot accept soft dollar benefits.” 

Accountants are required to maintain a register of the soft dollar benefits they receive up to the value of $300 – anything more is prohibited, Davison emphasises.

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