When is an investor sophisticated enough not to require a PDS?

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When is an investor considered sophisticated enough not to require a product disclosure statement (PDS)?

The Corporations Act states that a share offer to a sophisticated investor does not require a PDS when the minimum amount payable for the securities “on acceptance” is at least $500,000.

A recent Supreme Court of Victoria decision examined the words “on acceptance” and provides companies and fund managers promoting share offers with more clarification on this often tricky, and potentially dangerous, area of the Act.

Here, the court found that the well-known mining industry identity Joseph Gutnick had breached the disclosure requirements of the Corps Act for failing to offer a PDS when he arranged the sale of $1 million worth of shares in a company he chaired.

The court said a $100,000 upfront payment for the share sale, followed by instalments, meant that the sale did not meet the exemption requirements of Section 708 (paragraphs 8 and 9) of the Corps Act.

Mr Gutnick had argued that the investor did not need a PDS, noting that one of the instalments included a “balloon payment” of $500,000 months after the original instalment was paid.

Crucially, however, Justice Ross Robson thought otherwise, explaining that “the minimum amount payable for the securities on the acceptance of the offer, refers to the amount payable on acceptance of the offer and not sums payable subsequently on the purchase”. He said the plaintiff,  the Melbourne businessman Roy Tashi, would not have purchased the shares had he been “provided with the appropriate disclosure document”.

Mr Gutnick and his company Northern Star International were ordered to repay Mr Tashi his $1 million investment, with interest, and court costs.

Other PDS exemptions in Corps Act

As wholesale licensees would be aware, the labyrinth of the Corps Act contain a few other exemptions from the need to give a PDS to sophisticated or professional investors, including:

  • The investor satisfying the objective and substantial thresholds for income or assets under section 761G
  • The fund manager being satisfied on reasonable grounds of the investor’s professional investment experience under the qualitative criteria set out section 761GA. Wholesale licensees seeking to rely on this exemption should note that ASIC does police the exemption.

How CompliSpace can help

Australian Financial Services Licence holders are inundated with a raft of corporate governance obligations and an ever-growing compliance burden, which can easily distract focus away from core business activities.

CompliSpace delivers industry specific web-based policies, programs and procedures that can be quickly tailored and configured to suit an organisation’s needs and are kept up-to-date with legal and regulatory changes by our team of specialists.

Our team of compliance professionals and lawyers combine extensive expertise with practical technology-enabled solutions to simplify the complexity of the regulatory environment and allow our clients to focus on allocating resources toward improving financial performance.

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This blog is a guide to keep readers updated with the latest information. It is not intended as legal advice or as advice that should be relied on by readers. The information contained in this blog may have been updated since its posting, or it may not apply in all circumstances. If you require specific or legal advice, please contact us on (02) 9299 6105 and we will be happy to assist.

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