Following submissions from the Australian Securities and Investments Commission (ASIC), the Parliamentary Joint Committee on Corporations and Financial Services has commenced an inquiry into proposed increases to the financial threshold limits for investors to qualify as ‘sophisticated’. If implemented, the increased thresholds would represent the first change from the limits introduced with the inception of the Corporations Act in 2001.

In its submissions, ASIC has suggested the current financial limits are outdated and should be indexed to catch up to nearly 23 years’ worth of inflation. The proposed changes have certainly raised concerns for numerous stakeholders, including for those in the private investment community.

What to expect

When raising capital through the issue of new securities, companies are required in most instances to comply with certain disclosure obligations. These include providing prospective investors with sufficient information about the company’s operations and financial position prior to offering securities. However, these obligations do not apply if a company is proposing to issue securities to ‘sophisticated investors’.

To qualify as a sophisticated investor under the current test, an investor must hold at least $2.5 million in assets or earn more than $250,000 per year for two consecutive years. If ASIC’s proposed changes are adopted, these thresholds would increase to $4.5 million and $450,000 respectfully.

What do the changes mean?

Increasing the thresholds solely to account for the effects of inflation does not take into consideration a number of potential factors and consequences for stakeholders.

Factors which do not appear to have been taken into consideration include:

  1. the potential impact on:
    (a) early-stage investors, with anticipated changes to the threshold creating higher barriers to entry;
    (b) the broadening of wealth inequality and gender pay gaps;
  2. inflexibility for high income earners who may be subject to fluctuating incomes;
  3. geographical impacts, with potential asset value disparity across Australia (such as the value of the family home and other property investments differing between geographical markets); and
  4. the impact on innovation and technology, with Australia potentially losing its competitiveness against our foreign counterparts such as the United States and the United Kingdom, who maintain lower thresholds.

What’s the alternative?

Although the thresholds seek to prevent or minimise risk to retail investors, the proposed changes could possibly result in marginalising a significant portion of the private investment community.

Some potential alternative proposals include:

  1. exclusion of an investor’s primary residence (as suggested by the Financial Services Council) or personal assets from their asset pool. This is currently the case for countries such as the United States and the United Kingdom, and introducing such an exclusion may assist to maintain Australia’s attractiveness to foreign investors;
  2. introduction of a ‘gross income test’ for partners and spouses to reflect investments being made jointly, similar to the current test in the United States;
  3. the inclusion of a two-year transition period to account for those investors who are currently ‘sophisticated investors’ but who will not meet the threshold if the proposed changes were adopted; and
  4. establishing and introducing courses certified by ASIC to confirm investors’ credentials and assist in preventing investment risk. Currently in the United States and United Kingdom there are Professional Designation Pathways to accredited investor status for those who do not meet the threshold. Such courses could create additional ways for investors to qualify as ‘sophisticated’, even when not meeting the increased thresholds.

While raising the thresholds would factor for increased inflation, it remains to be seen whether this would have a material impact on the early-stage ecosystem by substantially reducing the number of investors who would meet the new criteria.

Written submissions can be made as part of the inquiry of the Parliamentary Joint Committee on Corporations and Financial Services before 15 May 2024.