wholesale investor tests

The Parliamentary Joint Committee on Corporations and Financial Services has called for written submissions to its inquiry into the wholesale investor test for offers of securities  by 15 May 2024. 

The inquiry commenced on 20 March 2023, with broad terms of reference to review the current wholesale investor/client tests, including legal requirements, identification of all contexts in which the tests are relevant, the consequences of an investor/client meeting the relevant test, and the application of the tests in practice.    

What’s the wholesale investor test? 

The wholesale investor test is designed to allow those investors who have the capacity to invest in riskier assets to do so. The test is wealth and income related – a wholesale investment is $500,000 and above, while sophisticated investors must have an accountant’s certificate confirming a gross income of at least $250,000 for each of the last two financial years or net assets of at least $2.5 million.  

These thresholds have been in place for many years and have not been adjusted for inflation.  

What’s a retail investor? 

The shareholders who don’t meet the wholesale or sophisticated investor tests are often termed retail shareholders, or retail clients. The aim of these thresholds is to protect everyone else who invests from ill-advised investment decisions made due to lack of financial experience and knowledge. 

These wealth markers are supposed to flag: 

  • financial success and earnings capacity; 
  • the ability to diversify assets appropriately; 
  • capacity to absorb losses; and 
  • financial capacity to seek additional information and advice before investing or to pursue redress through legal means if warranted. 

What’s the problem? 

Demographics and economics supports the theory that the ranks of emerging investors who meet the test will swell. There are those investors lucky enough to be homeowners for recent decades who easily meet the asset threshold, and there is the imminent transfer of assets from the older generations to their beneficiaries. 

There is concern that if thresholds are too low, more people who require the protections available for retail shareholders will experience losses that put their future financial security and home ownership at risk.   

On the other hand, tightening the tests may prevent retail investors from building an appropriately diversified and resilient portfolio suitable to their investing time frames.  

There is a place for investments in assets with higher risk/reward characteristics as well as those where performance not correlated to the sharemarket.  

ASA will make a submission by the end of April. Individuals wanting to make their own submissions can do so via the Inquiry’s webpage.   

Back to Insights