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What is a Sophisticated Investor, Wholesale Investor (or 708 Certificate) in Australia - YouTube
Channel: Kent Cliffe
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you may have been asked by a stock
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broker a product promoter or a fund
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manager to get your sophisticated
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investor certificate or you may simply
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be just curious as to
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what it is in this video i'm going to go
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through what it is
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i'm also going to talk about how it
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makes you different from a retail
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investor
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who can get it how do you get it why
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would you want to get it and most
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importantly what are the risks
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this way you will understand the
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legislation you will know the correct
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questions to ask the right people the
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lingo will be understood so it doesn't
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just go in one ear and come out the
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other and finally
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does it get you the better investment
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returns
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and the first thing is don't sue me this
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is just general advice
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you need to go to my disclaimer which is
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linked in the description section of
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this video
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and by going past this point in the
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video you agree to be bound by the terms
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and conditions of the disclaimer to
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understand the differentiation between
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retail investors and wholesale investors
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you effectively need to go back to the
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corporations act now the corporations
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act is some legislation
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that covers the whole of australia that
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asic regulates and basically it states
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that anytime you pull money
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so you collect money from multiple
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people to invest it is deemed to become
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a financial product
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there are some exclusions to the rule
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such as direct property is not a
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financial product
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and direct lending between two peers is
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not a financial product
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but everything else such as shares or
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managed funds will
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be seen under the corporations act as a
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financial product
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from what i've just discussed you'll
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note that i talk about retail investors
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now almost everyone unless they qualify
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as a sophisticated investor is
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considered a retail investor now my
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simplistic definition of a retail
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investor is basically an average
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everyday mum and dad australian who's
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looking to invest their money and needs
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to be protected by asic
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as i mentioned before the other type is
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sophisticated investors now these are
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considered
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wholesale investors sophisticated
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investors professionally investors
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or they fall under some exemption for
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the first part of the video i'm going to
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talk about the
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exemptions because that's the quick bit
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and then for the rest of the video i'll
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talk about the professional
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sophisticated
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and wholesale investors under one group
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definition which is wholesale
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for the sake of simplicity they're all
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slightly different but i'll just group
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them as wholesale investors the first
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exemption is for small scale offerings
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basically known in the game as the 2 12
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and 20
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rule if you're raising less than two
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million dollars in a 12-month period
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from less than 20 people
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the corporation act requirements of
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retail and wholesale investors does not
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apply
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firstly if you're in the business of
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doing this as in you're doing it more
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than once
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technically you still need to have an
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afsl and also if you're going out and
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promoting it to people you don't know
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technically you shouldn't be doing this
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you should only be introducing the
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investment to people you know
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or have already had dealings with the
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next exemption is
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if you invest over five hundred thousand
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dollars in one investment
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technically you don't need to qualify as
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a wholesale investor
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now i find this rule a little bit
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irresponsible because
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if you don't meet the criteria of a
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wholesale investor you probably
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shouldn't be putting five hundred
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thousand dollars into one
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investment finally this is not actually
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an exemption but
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technically if the afsl licensee
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believes that you have the
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qualifications
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to understand the investment and
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understand the risks and all these other
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criteria
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they can allow you to access that scheme
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even though you don't qualify as a
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wholesale investor how do you become a
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wholesale investor well there are
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criteria that you need to meet
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that your accountant will confirm the
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accountant will provide you a
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certificate which you'll provide to the
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product promoter and then they'll allow
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you to invest
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effectively this puts all the risk of
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you qualifying under those criteria back
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with your accountant
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and this is why they will want to make
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sure that you meet that criteria
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this brings me on to my next question
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which is what is a criteria and how do
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you qualify well
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don't hate me because the criteria often
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relate to net worth and wealth
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not so much as financial literacy and
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from my own anecdotal experience on the
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ground
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some people with a lot of wealth
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probably shouldn't be considered a
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wholesale investor
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and some people with a lot of financial
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literacy don't necessarily yet
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have a lot of wealth i've got the
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criteria here in front of me which i'm
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going to read out now basically you need
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gross income
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over 250 000 on the previous two
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financial years
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or the other option is you need to have
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net assets over two and a half million
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dollars
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or the other option is you need to have
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gross assets not
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net so gross assets that you control
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over 10 million dollars
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or you need to be an afsl licensee like
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me
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the other option is you could have a
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large business that employs over 20
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people
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the quirk in this is if you're in
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manufacturing you need to employ over
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100 people because clearly
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you're less financially literate than
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other industries that only employ 20
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people
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and the final criteria which is the most
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important criteria is subscribing to
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this channel
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because every wholesale investor should
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be subscribing to this channel so
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go down go down there and you know what
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to do just
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click that subscribe button for the sake
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of this video most people watching will
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qualify under the two and a half million
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dollars in their asset test
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or the 250 000 gross income so what i'm
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going to do is dig into the
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interpretation of these things in a
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little bit more detail
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what does gross income include well
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effectively gross income includes
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your wages as well as bonuses rents from
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rental properties
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uh interest that you receive basically
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every form of income excluding all
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deductions so the full form of income
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coming to you in a tax year and if you
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are investing with a partner such as a
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spouse
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their gross income can be consolidating
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to your gross income and you can invest
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as a partnership
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and for the business owners out there if
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your business turns over more than 250
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000
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in revenue it's not profit revenue then
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you may still qualify
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under the 250 000 gross income test also
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it's worth noting if you don't entirely
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own the business but have a controlling
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or beneficial interest in the business
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it is a little bit of a gray area that
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hasn't been clarified by asic but you
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should probably speak to your accountant
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to see
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if these interests in the business can
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allow the income of this business
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to qualify under the gross income test
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all these interpretations around the
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gross income test
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could be used as counting principles
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under the net assets test as well
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it is also worth noting under the net
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assets test that your superannuation
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and your primary place of residence as
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of the date of this video
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can be counted towards your net assets
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but there is a lot of pressure to have
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this
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changed the next question that commonly
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gets asked is once you personally
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qualify under the criteria
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can you invest through another entity
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now you can invest retrust you can
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invest through companies provided you
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have control of those entities so that
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means
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if you have a family trust and you as a
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trustee or you
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as a director of a trustee company
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qualify under the criteria then yes
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that family trust can invest through
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your s708 certificate
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the other gray area worth noting is
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self-managed super funds now
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up until recently it was believed that
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super funds or self-managed super funds
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had to qualify in their own right in
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order to be considered a wholesale
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investor
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now asic has come out and clarified that
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if members of the super fund do qualify
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as a wholesale investor
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then the super fund itself can invest in
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wholesale products
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but ultimately at the end of the day
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this is only general advice and you
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should speak to your accountant or
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financial advisor as to if
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your self-managed super fund does
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qualify as a wholesale investor
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now we're moving on to the fun stuff
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which is why would i want to be a
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wholesale investor so to do that the
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first thing we want to look at is what
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types of investments can retail
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investors invest in and then contrast
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that to
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what types of investments wholesale
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investors can invest in
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retail investors can invest in ipos and
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publicly traded companies on the asx
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so this covers things such as reits
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licks etfs and
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direct companies they can also invest in
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misses or manage investment schemes that
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have been registered with attic with a
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pds
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they can invest in direct property they
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can do direct lending
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and they can invest in investments that
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fall under one of the exemptions which
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i've mentioned that this list seems
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fairly comprehensive but there are some
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areas that retail investors do miss out
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on
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such as pre-ipo raisings seed rounds
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capital raisings for wholesale investors
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only or s708 deal sweeteners such as
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unlisted options
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or convertible notes there are hedge
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funds that you're not allowed to invest
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in unless you're a wholesale investor
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and ultimately the final thing is misses
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or managed investment schemes or
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syndicates or unit trusts whatever you
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want to call them
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that effectively are only limited to
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wholesale investors only
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to give you an idea as to why those
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things that i just mentioned don't go to
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retail investors i'm going to tell you
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from a perspective about
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afl licensee why for those types of
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investments
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we seek wholesale investors only the
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first thing is costs
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and to make a retail pds there needs to
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be a range of extra things that you
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don't need for a wholesale investor
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these include correct structure this
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includes legals it includes audit
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includes insurance it includes
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compliance and a whole raft of
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other additional factors in most retail
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offerings
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these can cost upwards of over a hundred
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thousand dollars which on small
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deals is not viable the next point is
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disclosure and complexity in this space
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deals come and go very quickly and they
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can be quite complex
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in order to get the disclosure up to a
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benchmark of a retail investor it does
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take time
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and the deal may have already gone and
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this is why wholesale investors with
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less disclosure get to see
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opportunities first the third point is
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kind of a self-fulfilling prophecy
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is the fact that the qualification
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criteria of a wholesale investor
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is a high net worth meaning that the
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capital pools for wholesale industries
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is quite deep
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so rather the extra complexity of a
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retail offering you can often go to the
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wholesale investor network and get the
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offering done in large chunks
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quite quickly and the final point is the
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burden of risk for a product
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manufacturer effectively
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it is commonly accepted principle that
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the wholesale investor market is
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by beware so what are the perks of being
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a wholesale investor well first things
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first
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is you do see a lot more investment deal
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flow now i am going to repeat that
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you see more investments it doesn't make
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them better investments
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think of it this way think of it as a
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bell curve effectively as a retail
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investor the bell curve is a lot tighter
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because there's a lot more governance
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and regulation
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but as you transition to the wholesale
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investor market the bell curve starts to
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spread
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meaning that more deals are effectively
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going to blow up and you're going to
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lose all your capital
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and potentially more deals are going to
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return slightly higher than what a
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retail investor would get
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you will also get the opportunity to
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invest with a smaller group of people in
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small-scale offerings
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now this means that effectively you can
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talk directly to the manager you'll sit
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a lot closer to the asset
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and you may make some decisions on what
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happens with the asset
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ultimately you might have more impact on
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your own investment returns
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the third thing worth mentioning on
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wholesale offerings is that less of your
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invested capital goes to expenses such
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as governance compliance and insurance
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meaning that if you have like-for-like
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investments on a retail offering and
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you've got lower costs
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ultimately as a wholesale investor
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you're going to make a bit more money
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what i've just talked about is the perks
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but what is the disadvantages of being a
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wholesale investor
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firstly and most importantly i'm going
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to hammer home this point and repeat
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myself you will see more investment deal
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flow as a wholesale investor
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but this doesn't necessarily make it
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better investments effectively it is a
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bell curve
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as a retail investor the bell curve is
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quite a bit tighter because of more
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governance
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and as a wholesale investor it is more
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likely you're going to blow up your
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money on one end of the spectrum
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and you might potentially make higher
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returns on the other end of the spectrum
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the next thing worth mentioning is fees
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and this is my own anecdotal experience
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with capital raisings through brokers
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for wholesale offerings i often find
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that the capital raise expenses are
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ultimately higher than retail offerings
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and your invested funds is funding some
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of the capital raising expenses
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some funds do offer discounts for
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wholesale investors versus retail
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investors and syndicates for wholesale
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investors the fees overall are often
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higher than retail offerings because the
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funds are smaller and they don't
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necessarily have the scale
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the next thing worth mentioning is the
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quick turnaround time for wholesale
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investments
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as i mentioned before the capital
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raisings are often smaller and the
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turnaround time expectation is often
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quicker meaning that you may not have as
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much time to conduct
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thorough due diligence the next thing
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worth mentioning is quite
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important and that is that wholesale
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schemes don't have to have any form of
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pi insurance
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meaning that no insurer has done any due
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diligence into the capability of the
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manager
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also wrongdoing is traditionally left up
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to the investors to enforce
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through litigation whereas with retail
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offerings asic
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and the asx often step in to act more as
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a financial police force now
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it's not always asic does sometimes step
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into wholesale schemes
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but traditionally they are they're more
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inclined to look after retail investors
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i have alluded to this before but the
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tests the asic deem
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under the corporations act to qualify
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you as a wholesale investor
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doesn't necessarily give you the
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financial literacy in order to be able
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to do the correct due diligence into a
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wholesale investment scheme
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and the final risk to wholesale
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investors is not
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subscribing to this channel because i
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will be going through in greater detail
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the due diligence
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wins and mistakes i make on investments
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so that you don't have to make those
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mistakes so
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go down there click the subscribe button
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yep you won't you're scared
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so now you know what a wholesale
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investor is how you become a wholesale
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investor what are the advantages of
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being a wholesale investor and what are
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the risks of being a wholesale investor
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now this doesn't necessarily mean you go
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out and make a hell of a lot of
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wholesale investments but get your
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financial literacy up so that you can
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conduct thorough due diligence
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on a range of different schemes until
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you find a great scheme
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or the next video best of luck and
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goodbye
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