Wholesale investment offers can promise attractive returns but don’t have the same protections of retail investment offers. Unless you are a very experienced investor you should proceed with caution and seek independent financial advice from a licensed financial adviser before investing in a wholesale offer. Here’s what it’s all about.

What is wholesale investing?

Wholesale investment offers are aimed at experienced investors, often with large sums of money to invest.

They’re designed to allow expert investors with experience and access to specialised advice and research to make investments without requiring disclosure designed to inform and protect investors.

This means companies can raise money for projects straight from wholesale investors without having to spend extra time and money complying with the more stringent rules that apply to regulated investment offers open to all investors, including retail investors.

Despite the use of that word “wholesale,” these investments aren’t necessarily cheaper, better value or offer any kind of discount than those which are made to retail investors.

What’s different is that the people looking to raise money have gone to the wholesale part of the market, choosing not to get investment funds from smaller “retail” customers. This avoids the cost of required disclosure, but limits the pool of potential investors to wholesale investors only.

How does someone qualify as a wholesale investor?

There are a number of categories of wholesale investor, including:

• professional investment businesses (e.g. registered banks and licensed insurers);
• persons that meet certain investment activity criteria;
• a large investor (e.g. net assets of more than $5 million in the last two financial years)
• certain government agencies; and
• where the minimum investment amount is $750,000.
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Another category of wholesale investor is an ‘eligible investor’. To qualify as an eligible investor, a person must certify that, broadly speaking, they have sufficient investment experience to assess the merits of the offer. The certificate needs to be confirmed by a lawyer, accountant or financial adviser and it is an offence to give a certificate knowing it is false or misleading in a material way.

What’s the difference in protection for investors?

There are quite a few protections that retail investors enjoy that don't apply to wholesale investors.

For example, investing in a wholesale offer will mean you don't receive a product disclosure statement (PDS). A PDS sets out the key characteristics, risks and features of the investment, in clear, concise and effective language that is designed for a non-expert investor. A PDS isn't required for wholesale offers.

If you invest in a wholesale offer it might also mean you're not dealing with a firm that has been licensed by the FMA. Licensing gives the FMA the ability to monitor the activities of the firm.

Wholesale offerors don't have to provide access to a free independent dispute resolution scheme if things go wrong. Retail investment offerors must provide this.

A wholesale investor will not always receive information about the investment’s ongoing performance and often won’t have a licensed supervisor (that’s an entity that looks after the interests of investors) in the case of debt securities such as bonds and managed investment schemes.

While offers to wholesale investors are not regulated in the same way as offers to retail investors, the offeror must still comply with ‘fair dealing’ requirements. This means the person making the offer cannot:

• engage in misleading or deceptive conduct in relation to the offer.
• make false or misleading statements in their offer documents or advertising.
• make unsubstantiated representations.
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“Disclosure isn’t required for a wholesale offer because the investor pool is intended to be limited to professional or experienced investors who can assess the merits of an offer, including value and risk.This requires the investor to be able to identify the information required to make that assessment (or to pay someone to do it.)”

- Paul Gregory, FMA Director of Investment Management

Why am I seeing advertising for wholesale offers if they’re not really suitable for me?

A report by the FMA looking into the topic uncovered “a number of undesirable practices in the market for wholesale offers.” Read the thematic review of use of the wholesale investor exclusion.

It includes this guidance: 

“Offerors should ensure that all advertising of a wholesale investment offer clearly states that it is open to wholesale investors only. The statement should be made in a sufficiently prominent manner to bring it to the attention of the audience.

To mitigate the risk of engaging in misleading, deceptive or confusing conduct, offerors should not use the term “eligible investor” or similar alongside the term “wholesale investor”.”

On the issue of ‘self-certifying’ as a wholesale investor, the report says:

“Offerors should be very careful around how they reference eligible investor certificates when engaging with potential investors that may not qualify as eligible investors, to avoid knowingly inciting, counselling or procuring an investor to give an eligible investor certificate that is false or misleading in a material way.”

The FMA advice to less-experienced investors – even if they have a lot of money – is to steer clear of wholesale offers or, if they really think they might meet the requirements, to get strong independent financial advice before investing.We expect advisers will only recommend that you become a wholesale investor if you have significant experience in investing and investment markets.

- Paul Gregory, FMA Director of Investment Management

Questions to ask yourself if you want to participate in a wholesale offer

Wholesale offers might seem attractive, and could offer high returns or access to opportunities not available to retail investors (for example venture capital). Be careful to not invest as a result of FOMO (fear of missing out). If you think you qualify, ask yourself these questions first:

Am I really sufficiently experienced?
Wholesale investors are generally experienced expert investors. How do I qualify to be experienced? Does a certain amount of money really make me experienced or an expert? Do I feel like I can assess the merits of the offer? Why does this product require me to be experienced?

Am I happy with fewer protections?
I will have fewer protections with this investment (including less disclosure about risk), than I would with other investments. How do I feel about that? What is so appealing about this investment that I am prepared to volunteer to have less protection?

Do I understand the risks of this investment?
What are the risks of this investment? Could I lose my investment? Where are risks disclosed or explained and, if they are not – or they are difficult to find – why is that? Is there an independent explanation of the risks – or is it a person associated with the offer explaining the risk? How do the risks compare with other investment options?

Do I understand the basis for the advertised returns?
If specific returns are forecast or expected as part of the advertising and disclosure, what is the basis for that? And what are the risks of the return being less, or nothing?