Emanuel Datt Flags Concerns on Sophisticated Investor Test Reforms

February 28, 2024 - Emanuel Datt, Chief Investment Officer (CIO) at Datt Capital, has expressed  significant concerns regarding the government's proposed changes to the sophisticated investor test  thresholds. The proposed plan aims to increase the threshold to a $5 million asset test, which Datt believes to be an aggressive move that may have detrimental effects on the broader economy over  time. 

Recent findings of Datt Capital's study on fraudulent activity in Australian markets highlights that  most predatory behaviour on investors falls within three categories: 

1. unlicensed fraudulent schemes (Ponzis),  
2. aggressive structuring of financial service offerings,  
3. and conflicted advice provided by non-independent financial licensees. 

The effects of the proposed changes are primarily focused on the level of disclosure required in  primary or secondary capital offerings. Retail offerings necessitate a Product Disclosure Statement  (PDS) leading to longer issuance timeframes and higher costs due to larger numbers. On the other  hand, wholesale offerings only require an Information Memorandum (IM), resulting in quicker  issuances with lower costs. 

Should the changes be enacted, Datt predicts that capital market intermediaries would face  significant challenges.  

“Brokers, wealth managers and investment managers across the spectrum are likely to find life more  difficult, whilst companies with large customer bases within capital markets that serve retail  investors may benefit. These businesses would likely capture investors previously qualifying as "wholesale investors" who may become self-directed,” says Datt. 

He offers a pragmatic solution to address the concerns raised.  

“Individuals falling within the top tax bracket could qualify automatically as sophisticated investors,  while those outside the top bracket could adhere to the previous test thresholds. This would  significantly reduce ‘red tape’ for investors and product issuers whilst providing a sensible middle  ground for those worried about tax bracket creep. 

“In addition, there should be increased regulatory focus on areas where a soft-touch approach has  traditionally been observed, specifically within the three categories of fraudulent activity identified  in our study,” he says.

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