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News Bulletin : ADA News Bulletin August 2010
41 AUGUST 2010 numbers as an identifier and by better harnessing the technology solutions that are available. WHY THE RICH GET RICHER Now that the debate around fees has yielded some positive results for investors it is time to focus on providing members of the Australian Dental Association with access to innovative financial products that have long been only available to professional investors and the very rich. Have you heard the saying "The rich get richer while the poor get poorer." One reason for this is that the rich get offered more opportunities for investment because they are deemed to be sophisticated or wholesale investors under Corporations Law. HOW IT WORKS Say for example that there is a special investment opportunity but it is only open to 'select investors' and not members of the public. If you are a member of the public (a retail investor) then you don't get exposure to these special (unregulated) investment opportunities. The Australian Government feels that you need protection as a retail investor and therefore you can only invest in investments that are contained in a prospectus or a product disclosure statement (PDS). These regulated investments have to go through many hoops before they can be offered to the general public so some limited protection is in place for mum and dad investors. Many issuers of investments don't want to deal with the mums and dads or incur the costs of preparing a prospectus or product disclosure statement. They prefer the simpler route of dealing only with a smaller number of the investors that are deemed to be sophisticated or wholesale investors. Consequently, these wholesale investors often get to look at and invest in better deals than the average investor. This gives wholesale investors an edge or advantage that translates into higher portfolio returns. These wholesale investors are in the top tax bracket so they are interested in investments that produce capital gains which are favourably taxed as opposed to income which is heavily taxed. Investors who already meet the minimum income and assets requirements qualify for access to these types of wholesale investment opportunities. All that is required is a trusted partner to help assess the investment merits of these wholesale opportunities. DO YOU QUALIFY TO BE A SOPHISTICATED INVESTOR? Last year, I wrote an article about 'sophisticated' or 'wholesale' investors highlighting the fact that many individuals may not be aware they are wholesale or sophisticated investors and could be missing out on investment opportunities because of ignorance of the rules. To be deemed a sophisticated or wholesale investor one of the following tests must be met: • Have net assets of more than $2,500,000 (excludes your primary residence) and have an accountant's certificate confirming this fact. • Have income of at least $250,000 over the last two financial years and have an accountant's certificate confirming this fact. • You are investing $500,000k or more into the investment opportunity. WHAT TYPES OF INVESTMENTS ARE AVAILABLE You may be surprised at the number of investment products only available to wholesale or sophisticated investors. They can be more complex than the average initial public offering or typical managed fund. Sometimes they require a quick decision with only limited information. Due to the short-term nature of these offerings there isn't time to issue a prospectus or PDS. This can result in increased risk but the discount offered usually offsets the risk. Another reason these opportunities are only available to wholesale investors is because these investors are exempt from retail investor rules that limit participation and can usually invest larger amounts of money. This makes wholesale investors a more attractive target for promoters and product issuers. Some of the types of opportunities available to wholesale investors are: • Private share placements occur when a publicly listed company wishes to raise more funds, usually for expansion or for an acquisition. Let's say they are raising $10,000,000, and rather than going to several small investors, they go to 20 wholesale investors who invest $500k each. From the companies point of view this is a much easier and faster way of raising the capital. The investor benefits because in most cases, they receive their shares at a discount rate to the current trading price meaning they get an immediate profit. • Pre-IPO offers where a company does a capital raising usually within the last 12 to 18 months prior to going public. Shares are usually offered at a discount to the IPO price. These opportunities are available through stockbrokers, investment banks and corporate advisory firms. • Private equity funds are generally only available to wholesale investors. They are specifically set up to accept money from wealthy wholesale and institutional investors and have limited liquidity but high target rates of return. • Special structured products are designed using financial structures that provide access to potential higher returns using certain asset classes whilst limiting the downside risk. An example might be a capital guaranteed product with significantly lower fees than are currently available in products offered to retail investors. • Credit products are bonds, debentures and debt. The normal minimum investment parcel is typically $500,000 -- $1,000,000. I QUALIFY -- WHAT DO I DO NEXT? After reading this article you may decide that you qualify as a sophisticated investor based on passing one of the above tests. But does this really make you a sophisticated investor or does it simply open you up to being sold investments without the normal investor protection regulations? In order to be offered access to these investments you need to provide an accountant's certification to view what is on offer. Certification allows you to consider what is available without an obligation to invest. It is suggested that you obtain the required certification to be eligible to view the available investments and be in a position to participate when the right opportunity presents. Accountant's certificates are valid for a period of two years from the date of issue. If you have any questions or require further information on the content of this article or any other investment subject -- see details below. Michael Lannon is the Managing Director of 2020 DIRECTINVEST, an ADA Partner Service specializing in the provision of execution only DIY investment services. Contact firstname.lastname@example.org or call 1800 352 021 Visit www.2020directinvest.com.au This article has been prepared without taking account of your objectives, financial situation or needs; and because of that, you should consider the appropriateness of the advice, having regard to the client's objectives, financial situation and needs. investment insight
ADA News Bulletin September 2010