By Jesse Hamilton
In a country that values fairness, it’s time we asked why our government’s investment laws are still stacked against everyday Australians.
It has been reported the government is considering tightening so-called ‘sophisticated’ investor rules that aim to protect regular people from falling victim to risky investment schemes.
The planned changes will 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.
But let’s look at Australian Securities Exchange (ASX)-listed companies for a moment.
The planned changes overlook the broader problem of arbitrarily dividing investors according to their wealth – a division that imposes a significant toll on small shareholders by excluding them from most capital raisings undertaken by ASX-listed companies.
These companies wanting to raise money by issuing shares are generally required to prepare a prospectus – a detailed disclosure document setting out information to allow people to make an informed decision about whether to invest.
But there is an exemption from disclosure requirements if the company limits the share issue to so-called ‘sophisticated’ investors.
Presumably the rationale for this exemption is that someone sophisticated enough to be able to assess the risks and merits of an investment doesn’t need the protection of a disclosure document.
Predictably companies have flocked to take advantage of this exemption since its introduction to avoid the cost and effort of preparing a prospectus.
Remember these capital raisings are typically conducted at a discount and ASX Listing Rules allow companies to issue up to 15 per cent of their equity each year without needing shareholder approval.
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.
It’s patently unfair for wealthier shareholders to be offered discounted shares. It’s also unfair that when companies raise capital, they typically see their share price rise as trading recommences, delivering a windfall to the lucky few who got in.
And to top it off, the new shares issued in the capital raising retail shareholders were excluded from are able to be sold back to them by the ‘sophisticated’ investors the very next day. So you weren’t sophisticated enough yesterday to buy the shares at a discount but today you’re fine to buy them at a higher price. Is that really fair?
The real cost increases from there. When small shareholders are excluded from a capital raise, their percentage of ownership in a company decreases. This means they end up with fewer votes and are entitled to a smaller share of the company’s dividends because their stake has been diluted.
These are not trivial concerns. In the past four years, over 500 ASX-listed companies have raised over $160 billion at significant discounts to market prices.
As it stands Wilson Asset Management benefits from the existing rules. Our status as a ‘sophisticated’ investor grants us access to opportunities that are out of reach for retail investors.
In fact this organisation regularly participates in capital raises on behalf of our 130,000 shareholders, and in doing so, accessing opportunities most of our investors would not be able to seize independently But that does not change the fact the rules are unfair?
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.
The ‘sophisticated’ investor rules were designed to protect people from loss. We’re all aware of stories of people losing their savings after falling victim to a predatory investment scheme and providing safeguards that protect people from financial loss is important.
But the current rules are unfair.
The definition of being ‘sophisticated’ enough to assess the risks and merits of an investment is not based on evaluating the actual knowledge and experience of an investor. Instead, a cruder tool is used via the notion of how rich you are.
Having assets of $2.5 million or annual income of $250,000 is currently enough to qualify but in what way is wealth a sensible proxy for financial literacy? How does inheriting money or selling a business deliver the sophistication to understand investment risk?
There are some simple reforms the government can implement to make the playing field fair for all Australians.
A knowledge test would allow regulators to better distinguish between those of us experienced enough to understand investment risk and those who should continue to benefit from government safeguards.
Qualifying investors by their actual knowledge and experience would help avoid wealthy, but inexperienced, people being trapped in risky investments without government protection. And it would allow experienced investors of lesser means to participate in wholesale investment schemes.
But a more important reform is this: all investors should be allowed to access capital raisings by ASX-listed companies.
New Zealand has already enshrined this in law such that its shareholders are allowed to participate in any offer of securities in a class already traded on the New Zealand Stock Exchange without requiring a prospectus to be issued.
The reform was based on the premise New Zealand’s strong continuous disclosure rules mean new disclosure documents are redundant.
The same holds true in Australia since the ASX is a world-leading securities exchange with equally robust continuous disclosure obligations.
We have a government that espouses a fair go for all. Let’s get rid of this unfair and un-Australian law that allows the rich to profit at the expense of everyone else.
