As accountants, many successful families in business request us to issue them with a “sophisticated investor certificate”.  In fact it is commonplace for every wealthy (ish) business minded family.

So why do you want to become a sophisticated investor?

A retail investor has many protections and mandatory disclosure obligations.  These can include a prospectus, investigating accountants report or other disclosure documents.  And while these documents are important and necessary to any investor – they can be costly and take a large amount of time.

A sophisticated investor gets access to investments that have not yet prepared these disclosure documents.  And the lack of disclosure might mean that the investment is higher risk and it might also offer a higher return. 

If you think of a company that is trying to list on a stock exchange – the company might raise money from sophisticated investors to get enough money to arrange for ASX listing.  And the early investors will often be given a lower entry price recognizing the extra risk taken.

Are investments looking to sophisticated investors good?

Mostly no.  There are a lot of crooks and unscrupulous operators that will not go through the effort and controls to give investors a disclosure document.  So these criminals market to sophisticated investors and can bypass the controls and then present any type of document to market the investment.

Of course, there are many great investments only available to sophisticated investors that offer much better returns than what the retail investor can enjoy.  And we typically find that these are identified with a licensed investment advisor rather than just a “mate of a mate”.  We recommend that every person who looks at making a sophisticated investment gets investment advice from a licensed investment planner or financial product advisor.

As a guide most unlisted property syndicates we see across our desk are only available to sophisticated investors.  A recent example had an “A grade” office tower in a capital city yielding over 9%.

How do I become certified?

Our practice can issue a sophisticated investors certificate.  We will do a bit of work (of course) investigating your current asset and income position to make sure you qualify – but we can turn around a certificate in a day or two.

What are the tests?

Sadly the ASIC guidance for complex structures is light on for detail.  So families with complex corporate groups have to walk through what entity is making the investment.

To qualify as a sophisticated investor you need to have either a gross income in excess of $250,000 a year for the last years or you have assets of at least $2.5m.

The other option to become a sophisticated investor is to invest at least $500k into a proposed investment.

Can my SMSF be a sophisticated investor?

Yes.  Provided your SMSF has net assets of $2.5m or a gross income over the last two years of $250k.

You cannot use your personal wealth or personal income and apply that to your SMSF.  The SMSF needs to pass the test itself.  In addition the SMSF has control issues to consider before the assets can be considered – however in a single member/single director SMSF this is easier.

What about controlled entities?

You can take into account the income and assets of entities you control.  Sadly the ability to control a company or trust is blurred with commercial business minded families as they also focus on asset protection and succession planning. 

How long does it last?

A sophisticated investor certificate will last for two years from the date of signing.  And each new certificate will require a fresh consideration of your circumstances.

What is the risk?

The risk to the user of a sophisticated investment is that they invest and lose money because they were not fully aware of the investment they were undertaking.  The risk to the accountant preparing the certificate is that the client realizes they did not qualify for the certificate and link their loss to the accountant who prepared the certificate.

How else can you get a sophisticated investment certificate?

An investment advisor, stockbroker or financial planner can also certify that you are a sophisticated investor based on your knowledge and experience.

Sadly we do not see this option happening very often and the main preference is to use the accountants certification.

Do you have any sophisticated investments?

No.  We are family business advisors and we do not promote investments.  We have never seen a great tax advisor work in the same business as a great investment planner. 

A smart family in business will separate the investment advice from the structuring advice.  The advisors should be friendly but not friends.  This gives a family the bests option for choosing their team and getting the right advice for them as opposed to a “one stop shop”.