Am I sophisticated investor? Here’s how to tell and what special privileges it gives you
Nick Sundich, December 18, 2024
Am I sophisticated investor? That is a question commonly asked, and one that you could answer yes to simply on the basis of your ‘track record’. Obviously the problem with that is ‘past performance is not a reliable indicator of future performance’. And we’re not talking about ‘successful’ investors, but sophisticated investors in the sense of being judged as being worthy to accept certain opportunities that may not otherwise be available to you.
Am I sophisticated investor? Yes if…
…you meet any of the following criteria.
- You have a certificate issued by a qualified accountant designating you as such, although this is only available to you if you’ve met gross income or net asset tests ($250k and $2.5m respectively – figures unchanged since the Corporations Act was first legislated in 2001);
- Have paid at least $500,000 for any qualifying shares in such an offer
- Are offered through a financial services licensee who is satisfied you have experience to assess the offer and has you sign a written acknowledgement that the licensee hasn’t given you a disclosure document,
- Meet the requirements of being a ‘professional investor’ under the Corporations Act, or
- Have or control gross assets of at least $10m (including any assets held by an associate or a trust you manage.
OK, I am a sophisticated investor! So then what?
You can access certain investment opportunities not available to others, particularly early-stage private companies. This does mean you don’t need to be provided as much disclosure about your investments, because you theoretically have more experience being a sophisticated investor.
Of course, you should be able to ask questions as part of your due diligence and should not invest in something where information is deliberately being withheld from you. But, as ASIC itself says, ‘Sophisticated investors are more likely to be able to evaluate offers of securities and some financial products (such as interests in managed investment schemes) without needing the protections of a regulated disclosure document’.
As a sophisticated investor, you may also be entitled to certain tax incentives, dependant on what you invest in. Most particularly, if you invest in a qualifying ‘early-stage innovation company’, you can get a tax offset equal to 20% of the investment to be used either in the year of or potentially carried forward; or modified capital gains tax treatment that includes disregarding captain gains on shares held in an ESIC between 1-10 years. There is no investment limit, although the maximum offset is capped at $200,000.
Are changes coming?
As we noted above, the thresholds are unchanged since 2001 – not even for inflation. Obviously there are a lot more people who would meet the criteria now, especially considering the family home can now be subject to the asset tests. Property prices are 290% higher in the last 2 decades. It is estimated that 16% of Australians met the criteria in 2022, compared to less than 2% back in 2001. Moreover, ANU predicts that 29.1% could meet this mark by 2031 and 43.6% by 2041.
The Albanese government has considered lifting the threshold in light of concerns about retirees investing in strategies they never understood. ASIC formally recommended a net assets test of $4.5m and gross income test of $450,000. This proposal has not been acted upon and it does not seem like anything will happen at least until after the next election. Assistant Stephen Jones said on the record at a Financial Services Council event that it was,’ not the most pressing thing coming down on the government,’ and indeed he is right. But he could not even get something he said would be a priority through – the $3m super tax.
Conclusion
You are more likely to be a sophisticated investor than you were in 2001, and could well in the years to come if the thresholds remain unindexed. But it is important to note that it is not on the basis of your success, it is how much you have to invest.
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