Writing in today’s AFR, corporate and M&A partner Jeremy Lanzer argues that, for too long, the Corporations Act has relied on blunt, outdated proxies – arbitrary numbers and wealth thresholds – as the gatekeepers of investor protection.
Describing the “sophisticated investor” test as a “regulatory relic”, Jeremy says that for two years the government has been sitting on requests from the Australian Securities and Investments Commission to lift the threshold for who qualifies.
“Introduced more than two decades ago, the test presumes that having $2.5 million in assets or $250,000 in income makes a person financially literate and capable of assessing risk. That assumption is shaky at best. Asset values say little about whether someone understands complex investment structures.
“The debate now unfolding over whether to lift the $2.5 million and $250,000 thresholds risks repeating the same essential mistake because it focuses on numbers, not principles. Adjusting thresholds might buy time, but it leaves intact a fundamentally flawed framework. Investors and companies alike will still be governed by blunt, arbitrary rules that do not reflect today’s capital markets, let alone what tomorrow’s markets might require.”
Much like the sophisticated investor test, Jeremy goes on to say that the 50-member rule no longer makes sense in practice.
“By capping the number of non-employee shareholders a private company can have, the law pushes businesses to go public or restructure once they cross that line. The distinction turns not on who the investors are or whether they need protection, but on an arbitrary headcount.
“Both rules limit access to growth capital and fail the very investors they are meant to protect.”
