If you’ve spent much time on social media over the past year, you might have seen advertising for investment offers - often property developments - that say they’re open to “wholesale investors” only.
Wholesale investment offers can promise attractive returns but don’t have the same protections of retail investment offers. Unless you are a very experienced investor you should proceed with caution and seek independent financial advice from a licensed financial adviser before investing in a wholesale offer. Here’s what it’s all about.
Wholesale investment offers are aimed at experienced investors, often with large sums of money to invest.
They’re designed to allow expert investors with experience and access to specialised advice and research to make investments without requiring disclosure designed to inform and protect investors.
This means companies can raise money for projects straight from wholesale investors without having to spend extra time and money complying with the more stringent rules that apply to regulated investment offers open to all investors, including retail investors.
Despite the use of that word “wholesale,” these investments aren’t necessarily cheaper, better value or offer any kind of discount than those which are made to retail investors.
What’s different is that the people looking to raise money have gone to the wholesale part of the market, choosing not to get investment funds from smaller “retail” customers. This avoids the cost of required disclosure, but limits the pool of potential investors to wholesale investors only.
There are a number of categories of wholesale investor, including:
Another category of wholesale investor is an ‘eligible investor’. To qualify as an eligible investor, a person must certify that, broadly speaking, they have sufficient investment experience to assess the merits of the offer. The certificate needs to be confirmed by a lawyer, accountant or financial adviser and it is an offence to give a certificate knowing it is false or misleading in a material way.
There are quite a few protections that retail investors enjoy that don’t apply to wholesale investors.
For example, investing in a wholesale offer will mean you don’t receive a product disclosure statement (PDS). A PDS sets out the key characteristics, risks and features of the investment, in clear, concise and effective language that is designed for a non-expert investor. A PDS isn’t required for wholesale offers.
If you invest in a wholesale offer it might also mean you’re not dealing with a firm that has been licensed by the FMA. Licensing gives the FMA the ability to monitor the activities of the firm.
Wholesale offerors don’t have to provide access to a free independent dispute resolution scheme if things go wrong. Retail investment offerors must provide this.
A wholesale investor will not always receive information about the investment’s ongoing performance and often won’t have a licensed supervisor (that’s an entity that looks after the interests of investors) in the case of debt securities such as bonds and managed investment schemes.
While offers to wholesale investors are not regulated in the same way as offers to retail investors, the offeror must still comply with ‘fair dealing’ requirements. This means the person making the offer cannot:
A report by the FMA looking into the topic uncovered “a number of undesirable practices in the market for wholesale offers.” Read the thematic review of use of the wholesale investor exclusion.
It includes this guidance:
“Offerors should ensure that all advertising of a wholesale investment offer clearly states that it is open to wholesale investors only. The statement should be made in a sufficiently prominent manner to bring it to the attention of the audience.
To mitigate the risk of engaging in misleading, deceptive or confusing conduct, offerors should not use the term “eligible investor” or similar alongside the term “wholesale investor”.”
On the issue of ‘self-certifying’ as a wholesale investor, the report says:
“Offerors should be very careful around how they reference eligible investor certificates when engaging with potential investors that may not qualify as eligible investors, to avoid knowingly inciting, counselling or procuring an investor to give an eligible investor certificate that is false or misleading in a material way.”
Wholesale offers might seem attractive, and could offer high returns or access to opportunities not available to retail investors (for example venture capital). Be careful to not invest as a result of FOMO (fear of missing out). If you think you qualify, ask yourself these questions first:
Am I really sufficiently experienced?
Wholesale investors are generally experienced expert investors. How do I qualify to be experienced? Does a certain amount of money really make me experienced or an expert? Do I feel like I can assess the merits of the offer? Why does this product require me to be experienced?
Am I happy with fewer protections?
I will have fewer protections with this investment (including less disclosure about risk), than I would with other investments. How do I feel about that? What is so appealing about this investment that I am prepared to volunteer to have less protection?
Do I understand the risks of this investment?
What are the risks of this investment? Could I lose my investment? Where are risks disclosed or explained and, if they are not – or they are difficult to find – why is that? Is there an independent explanation of the risks – or is it a person associated with the offer explaining the risk? How do the risks compare with other investment options?
Do I understand the basis for the advertised returns?
If specific returns are forecast or expected as part of the advertising and disclosure, what is the basis for that? And what are the risks of the return being less, or nothing?
Regulated offer: A regulated offer means an offer of financial products to one or more investors where at least one of those investors requires disclosure, usually a product disclosure statement (PDS). More disclosure is required here because the investor pool can include members of the public with little or no investment experience.
Wholesale offer: Less disclosure needed – since only those investors with suitable experience and resources are able to invest.