Investor classification matters to both investors and fund raisers: investors classified as retail investors receive the benefit of safeguards in the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA), while many fund raisers and their financial intermediaries prefer to bypass retail investors altogether in exchange for less stringent offering and business conduct requirements.
As part of its “Consultation Paper on Proposals to Enhance Regulatory Safeguards for Investors in the Capital Markets” (Consultation Paper), the Monetary Authority of Singapore (MAS) is proposing to refine the investor classes under the SFA and FAA. Should the MAS decide to proceed with the proposed changes, the impact on investors, fund raisers and their intermediaries and advisors will be significant.
OPT-IN REGIME FOR ACCREDITED INVESTORS
An accredited investor (AI) is one of the three main classes of non-retail investors, with the other two classes being the institutional investor (II) and the expert investor (EI). Presently, an investor who meets any of the following criteria spelt out in the SFA is automatically classified as an AI:
- an individual whose net personal assets exceed S$2 million, or whose income in the preceding 12 months is not less than S$300,000;
- a corporation with net assets exceeding S$10 million, or whose sole business is to hold investments and the entire share capital of which is owned by one or more persons, each of whom is an AI;
- the trustee of a trust of which all property and rights of any kind whatsoever held on trust for the beneficiaries of the trust exceed S$10 million;
- an entity (other than a corporation) with net assets exceeding S$10 million; and
- a partnership (other than a limited liability partnership within the meaning of the Limited Liability Partnerships Act 2005 (Act 5 of 2005)) in which each partner is an AI.
There is presently no way for an investor to opt out of the AI classification, even if the investor wishes to benefit from the safeguards offered to retail investors in the SFA and FAA. Additionally, investors may not even be aware of their AI status or the implications of such classification.
Accredited Investors to Expressly Opt-In
To address these concerns, the MAS is proposing an opt-in regime for AIs. The proposed change will ensure that eligible individual investors will be able to choose their investor classification and in so doing, elect the level of regulatory protection afforded to them.
The starting point would be that all investors other than IIs would be considered retail investors. An investor who meets any of the present AI criteria (subject to several changes to the criteria proposed in the Consultation Paper and discussed below) would be known as an Eligible Investor. An Eligible Investor may elect for AI status by notifying the relevant financial institution or intermediary (FI) in writing.
An Eligible Investor will have to elect for AI status with each FI that the Eligible Investor does business with. He can choose to remain classified as a retail investor with one FI and be classified as an AI with another. He may also switch between AI and non-AI status (or vice versa) at any time.
Two Year Period to Seek Consent of Accredited Investor Clients
Implementation of the proposed changes would place additional recordkeeping and monitoring obligations on FIs. As an initial step, FIs would have to provide a written notification to all Eligible Investor clients of their initial classification, their right to request for AI status and a clear written description and warning of the regulatory safeguards that may be dis-applied if they opt in to AI status. Subsequently, FIs would have to periodically review their existing AI clients’ eligibility for AI treatment, as well as verify the client’s status if the FI should become aware of changes that could affect the AI classification.
The MAS is proposing a two-year transitional period to migrate existing AI clients to the new opt-in regime, although existing AI clients may choose to be re-classified as retail investors during the transitional period.
REVISED ELIGIBILITY CRITERIA FOR ACCREDITED INVESTORS
As mentioned above, the Consultation Paper also proposes several changes to the AI criteria:
- Currently, an individual whose net personal assets exceed $2 million, or whose income in the preceding 12 months is not less than $300,000, is considered an AI. The MAS is proposing that an individual’s primary residence only contribute up to $1 million of the minimum net assets threshold of $2 million.
- Currently, a corporation whose sole business is to hold investments and the entire share capital of which is owned by one or more persons, each of whom is an AI, is considered an AI. The MAS proposes removing the requirement for the corporation to be an investment holding company, such that any corporation wholly owned by AIs would be considered an AI as well.
WIDENING THE DEFINITION OF INSTITUTIONAL INVESTOR
The current II definition includes the Singapore government and MAS- regulated FIs that carry out capital markets services activities. MAS is proposing that the II definition be extended to include foreign entities carrying out financial services activities similar to those for which MAS licences are granted, provided that they are authorised, licensed and/or regulated in one or more foreign jurisdictions.
MAS is also proposing that the II definition include all central government and central governmental agencies of foreign states, supranational governmental organisations (such as the World Bank and International Monetary Fund) and sovereign wealth funds.
REMOVING THE EXPERT INVESTOR CATEGORY
The MAS is proposing to remove the EI class from the regulatory framework, on the basis that it is of limited application. Thus, EIs will assume retail status unless they are Eligible Investors and choose to opt in to be AIs.
The proposed changes touted by the MAS in the Consultation Paper strike a balance between a number of factors: in particular, the opt-in regime empowers Eligible Investors to choose which level of regulatory protection they wish to have, while ensuring that adequate safeguards are available to all. It also brings the Singapore position in line with that of Hong Kong, the European Union and international best practices recommended by the International Organization of Securities Commissions (IOSCO).