Firstly, it sounds more sexy than plain old vanilla investor. Secondly, it is a typically confusing term dreamed up by some compliance geek or lawyer to further complicate the financial services industry. Let’s try to put it into simpler language below.
The definition changes depending on where you live but here in Australia you’ll fall under the Corporations Act 2001. To be considered a sophisticated or wholesale investor you need to meet at least one of the following benchmarks:
- Have proof of net assets of more than $2.5m;
- Have proof of income of at least $250k over the last two financial years;
- Are investing $500k or more into the opportunity.
Proof should be provided by a certified accountant. In general, if you don’t meet at least one of the above, you will be deemed to be a retail investor.
Why should you care if you are a Sophisticated or Wholesale investor?
In short, someone who has met one of the above tests is theoretically more knowledgeable and when it comes to investing. Therefore, they should be able to analyse the deal and invest in anything they want and get some discounts or first mover advantages. We personally don’t agree with this, we know some very rich dumb people but the law is never perfect and on the whole it seems to work.
What are the key benefits of being a Sophisticated or Wholesale Investor?
Many attractive products and investments are only available to sophisticated or wholesale investors, effectively you are in the club. Another advantage of being a sophisticated or wholesale investor is that the deals tend to be bigger so you’ll have to invest less time managing your portfolio. Being a sophisticated investor allows you to participate in deals such as private placements, pre-IPO offers and private equity funds. These deals are attractive as they often offer wholesale discounts much like any other wholesale to retail relationship.
Retail investors have some rules imposed on them that sophisticated or wholesale investors do not such as the 20/12 rule. The 20/12 rule limits the number of retail investors who can invest in a particular opportunity to 20 within a 12 month period. The promoters of such opportunities therefor see this rule as a limitation so they prefer to take the opportunity to the many sophisticated investors.
In short, if you meet the test you should be experienced enough to look after yourself. Good luck.
Tags: Corporations Act 2001, Deal, High Net Worth, Investor, Investors, IPO, Private Equity, Sophisticated, Sophisticated Investor, Wholesale, Wholesale Investor
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