Wholesale investor offers - not a 'free-for-all'
14 April 2022
Market participants will have seen the recent Interim Stop Order issued by the Financial Markets Authority (FMA) in connection with the offer for investment in a wholesale fund associated with an Auckland townhouse development.
The offer related to interests in a limited partnership to be established as a funding conduit for the development of approximately 200 townhouses at Flat Bush, Auckland with a value of approximately NZ$210m.
The offer was structured to fall outside the regulated regime provided for in the Financial Markets Conduct Act 2013 (FMCA) - the offer was for "wholesale" investors only.
Structuring the offer in this way removed the requirement for, among other things, the appointment of a licensed supervisor, the completion of a governing document incorporating various prescribed content and the preparation (and registration) of comprehensive disclosure documents complying with the FMCA and related Regulations.
The Information Memorandum prepared for the offer included statements regarding the expected return (a mammoth 50% over three years), various risks and risk mitigations and the assistance of specialist advisers to provide expert "advise" [sic].
The FMA issued the Interim Stop Order on the basis that it considered it was:
"…in the public interest as significant financial harm to investors could result from investing in units of the Fund in reliance on restricted communications that may be false or misleading, or likely to mislead or confuse in respect of the returns payable to investors and the level of risks in the investment…".
Offers of financial products are regulated by the FMCA, however there are exclusions from the comprehensive investor-protection regime of that legislation (which covers licensing, governance and disclosure) that are available for "wholesale" investors and other categories of excluded offerees eg, close business associates and relatives.
The exclusions include certain complying requirements (including, among other things, warning statements and some certifications), while the 'fair dealing' provisions of the FMCA apply regardless of any exclusions and operate to restrict conduct that is misleading or deceptive or likely to mislead or deceive in relation to any dealing in financial products.
Market participants should therefore be aware that a wholesale offer does not equate to a 'free-for-all'. Further, participants should be aware that wholesale offers are a focus area for the FMA and increased scrutiny from the regulator should be expected - Samantha Barrass, FMA Chief Executive noted recently in a speech to Financial Services Council Connect (16 March 2022):
"….. we are taking a deeper look at the wholesale investing sector. These investments are on the edge of our regulatory remit and we want to better understand who is investing in these products and the level of risk for investors. We are particularly focused on whether / the extent to which vulnerable consumers and people who are, in practice, retail investors are accessing wholesale markets and the harm this may cause them and their families."
We await with interest the outcomes in this area, including whether the FMA will issue a full Stop Order in relation to the Flat Bush limited partnership offer. In the meantime, while it is a truism for most legal matters, securing specialist legal advice is critical for anyone wishing to operate in this space.
If you would like advice on how this may impact you and how we can assist, please contact a member of our financial services regulation team.