By Glenda Korporaal
Wilson Asset Management is calling on the federal government to abolish the “sophisticated investor” test for all investors in ASX listed companies.
In a letter to shareholders on Wednesday, WAM chairman and chief investment officer Geoff Wilson said the rights of Australian investors would be “compromised” if the government went ahead with proposals to increase the income and asset test for sophisticated investors.
Mr Wilson said the test, which is theoretically designed to protect small investors from making risky decisions, was effectively working to deny small shareholders access to some well-priced capital raisings by ASX-listed companies. “We believe the test needs to be abolished for all Australians investing in ASX-listed companies,” he said.
The government is reviewing the threshold to qualify as a “sophisticated” investor, with reports that it will rise to $4.5m in assets or $450,000 in income, up from the current test of investors having assets of $2.5m or annual income of $250,000. The move would increase the number of investors deemed to be unsophisticated retail investors, subject to stricter investor protections.
Mr Wilson said the proposal was “negative for retail investors investing in ASX-listed companies and significantly favours big businesses at the expense of Mum and Dad investors”.
He is urging shareholders to make submissions to the government to oppose the move.
Retail investors not deemed “sophisticated” by the government missed out on $15.7bn of value through discounted capital raisings by ASX-listed companies between January 2020 and April this year, research shows. The federal Parliamentary Joint Committee on Corporations and Financial Services began an inquiry into the wholesale investor test in March with calls for written submissions by May 15.
Mr Wilson said his company was proposing abolishing the wholesale investor test completely for listed companies, allowing all shareholders to participate in placement equity raisings by ASX listed companies.
He said this would ensure fairness to small shareholders, arguing the government needed to recognise the effectiveness of the ASX’s continuous disclosure rules and encourage companies to value equity from all shareholders versus unfairly excluding smaller retail shareholders.
WAM is arguing that the sophisticated investor test should be replaced with a new test of the financial literacy of the investor.
WAM chief financial officer Jesse Hamilton said the current investment laws were “stacked against everyday Australians.”
He said the planned changes would lift the income and wealth thresholds that qualify an investor as “sophisticated” and make it harder to access opportunities like investing in start-ups and buying into property syndicates.
The finance head said the current system of defining “sophisticated investors” was arbitrarily dividing investors according to their wealth which was taking a “significant toll” on small shareholders by excluding them from most capital raisings undertaken by ASX-listed companies.
ASX-listed companies wanting to raise money by issuing shares were generally required to prepare a prospectus to allow people to make an informed decision about whether to invest, but companies did not need to do this if they were only seeking funds from “sophisticated” investors.
“Predictably, companies have flocked to take advantage of this exemption since its introduction to avoid the cost and effort of preparing a prospectus,” he said.
Many of these capital raisings were typically done at a discount to the existing share price.
“This means retail shareholders are significantly disadvantaged when their ‘sophisticated’ counterparts get the chance to buy more shares at a discount to the market rate,” he said.
“It’s patently unfair that wealthier shareholders get offered discounted shares.”
New shares issued in the capital raising that retail shareholders had been excluded from were then able to be sold back to them by the “sophisticated investors” the very next day at a higher price.
Ms Hamilton said excluding small shareholders from capital raisings also meant their percentage of ownership in a company decreased. “In the past four years, over 500 ASX-listed companies have raised over $160bn at significant discounts to market prices,” he said.
WAM benefited from the existing rules because of its status as a “sophisticated” investor. “But that does not change the fact that the rules are unfair,” he said.
“All shareholders should be treated equitably. Wealth should not make you more eligible for benefit. A lack of funds should not bar you from opportunity.”
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