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FMA Advertising Guidelines – A watershed moment for wholesale investment

22 November 2021

Last month, the Financial Markets Authority (FMA) published its guidelines on advertising for financial products.  Recent advice to clients, in addition to many years advising on a wide array of financial products, has caused us to reflect on the implications of these guidelines for wholesale investment.

Back in the day (let’s say the year 2000), it was generally accepted that, disclaimers aside, the only rules guiding wholesale advertising were the usual Fair Trading Act concepts of misleading and deceptive conduct.  At the time, exemptions for wholesale investors under the Securities Act were vaguely defined and even less well understood.  What was well accepted was that only the truly sophisticated, experienced, and wealthy could invest in wholesale offers. 

As a result, the wholesale pool of funding was relatively small.  For many raising capital, it made more sense to register a prospectus and seek funds from the public.  Why not?  Back then, it was a relatively simple exercise.  Accordingly, wholesale offers were rare.  There was also little interest in these offers from a regulator’s perspective.  The select few, who could invest, were usually sophisticated enough to understand what they were doing, and appreciated that they could lose their money.

Fast forward to 2021.  Behind us: the global financial crisis, multiple finance company collapses, the end of easy public money, and the generational shift from the Securities Act to the Financial Markets Conduct Act (FMCA). 

One of the main complaints about the Securities Act was the poorly defined categories of wholesale investors.  Consequently, the FMCA re-defined and expanded these categories in Schedule 1.  Unlike the past, the rules are now relatively easy to follow.  Changes like investment activity thresholds, simpler eligible investor certification rules, and small offers have greatly increased the number of investors who can invest in wholesale offers with certainty.

On the regulated (or public offer) side, however, raising capital has become significantly harder.  Highly prescribed product disclosure statements have replaced prospectuses.  A greater degree of supervision and market services licences are also required.  The cost of compliance is huge, and for many not worthwhile.  Consequently, with very few exceptions, the regulated offer space now belongs to the IPOs, banks, and fund managers.

So, it is perhaps unsurprising (but we expect largely unintended) that most new offers are wholesale offers.  And why not?  The pool of investors, and investment funds, is larger and better understood.  It is also much simpler and cheaper than going down the regulated path.  In addition, there are very few ongoing compliance obligations.

As a consequence of this increased activity, the FMA is now starting to focus on wholesale offers.  This was signaled by the outgoing CEO in a speech to the Financial Services Council in February 2021.  This stance has been followed up by the Advertising Guidelines issued on 13 October 2021.  The guidelines include a series of general rules, elaborating on the FMCA’s fair dealing provisions.  These rules are equally applicable to regulated and wholesale offers.  Although the FMA still considers it important to understand the audience for an advertisement, the implication is that the wholesale audience is now significantly less sophisticated than it used to be.

The wholesale investment area has changed greatly.  The rules are no longer simple.  There is also the greater attention of the regulator to consider.  As a result, significantly more care is now required in preparing wholesale offers and advertisements.