In January, the Herald raised the issue with then Commerce and Consumer Affairs Minister Scott Simpson, who said he had asked the Ministry of Business, Innovation and Employment (MBIE) for advice on the matter.
This week, his successor Cameron Brewer released a MBIE consultation document aimed at addressing the problem, among others related to capital markets.
The ministry noted that New Zealand’s eligible investor regime was “unique” and “relatively permissive” by international standards.
It recognised there was “some evidence” that inexperienced investors were accessing wholesale offers.
It noted companies were increasingly using mainstream and digital channels to promote wholesale offers to mass audiences. Issuers were promoting high returns, downplaying risks and not clearly marking opportunities as wholesale only.
On the other side of the coin, MBIE recognised the system could make it hard for companies to raise capital.
For example, eligible wholesale investor certificates are only valid for two years, meaning someone who legitimately clears the hurdles to get this certification faces disproportionate cost and hassle renewing it if they want to keep investing in an offer.
MBIE said the process also didn’t recognise the guidance mum and dad investors received from investment clubs.
It said the challenge was figuring out how to protect investors without closing off investment activity, noting that while some thought protections were insufficient, others believed they were too strict.
MBIE put a range of potential fixes on the table.
It said the advertising of wholesale offers could be restricted.
A more objective test around who qualifies as an eligible wholesale investor could be created to ensure individuals understood their investment capabilities.
A cap could be put on the amount an eligible wholesale investor can invest to reduce their exposure to risk and/or more of the onus could be put on lawyers, accountants and financial advisers to ensure they accurately certify eligible wholesale investors.
Last year, the FMA referred 22 accountants and eight lawyers to their professional bodies after an investigation into the misuse of investor certificates.
To reduce regulatory costs, MBIE also suggested the two-year certification period could also be extended to five years or removed altogether. Investors would still need separate self-certifications for different investments.
In January, Stace Hammond law firm managing partner Patrick Wilson told the Herald the current regime was neither providing investors with sufficient protection nor doing enough to help businesses raise capital.
He believed there shouldn’t be a delineation between wholesale and retail investors if their level of sophistication was similar.
The fact so many investors and issuers went down the wholesale route proved the full retail disclosure system wasn’t working.
Wilson believed it was too time-consuming and expensive for many businesses to offer retail investments.
Furthermore, he questioned the value of some of the disclosures they are required to make. In his experience, investors often didn’t make decisions based on this information.
Accordingly, he believed disclosure requirements could be pared back, but made more relevant. For example, issuers could be required to provide information about their investments on offer, as well as themselves, including their links to other companies.
Wilson said the onus should be on issuers to provide the right information.
Members of the public have until August 25 to respond to MBIE’s consultation.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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