The Australian corporate regulator has closed a loophole that allowed accountants to lure mum-and-dad investors to risky startups usually only available to sophisticated investors.
Music streaming startup Guvera raised more than $185 million over nine years before shutting down in May. Out-of-pocket investors included retail investors, recruited by their accountants, who didn’t realise the high-risk nature of the company that only made $1.2 million of revenue in the 2016 financial year.
Guvera was never directly allowed to attract such investors, but participating accountants — who received inducements — reportedly created intermediary trusts or company structures for the money to be put into, allowing them to get around the “sophisticated investor” test.
Now another startup, video messaging venture Kwickie, led by Darren Herft — the same man that orchestrated Guvera’s capital raising activities — is doing the same thing. But the Australian Securities & Investments Commission (ASIC) has stepped in to prevent further exploitation of the loophole.
“ASIC has made a declaration, to put the issue beyond doubt, that Kwickie International Ltd shares may not be offered to retail investors through a trust structure,” the organisation announced.
“ASIC is continuing its investigation into the use of these structures. ASIC is also in discussions with the appropriate accounting professional bodies about this issue.”
Sophisticated investors are certified as those that have assets of more than $2.5 million or a gross income of $250,000 for at least the last two years. Ventures that are open to only sophisticated investors have less stringent paperwork and fewer investor protections — like not providing a prospectus — than those that are open to retail investors.
ASIC said the way the accountants had set up the intermediary trust mechanisms were not in the spirit of those safeguards that protect mum-and-dad investors.
“ASIC is aware that, in certain recent fundraisings, some accountants have used trust or company structures that purport to allow investors who are not ‘sophisticated investors’ to receive offers to purchase shares without a prospectus or other disclosure document. This has recently occurred in relation to offers of shares by Kwickie International Limited.”
Accountants were also warned by ASIC to not provide financial advice to clients without holding a proper licence.
The ABC revealed last month that Guvera was under investigation by ASIC for its recruitment of retail investors, who eventually lost all their money. The startup sponsored the popular Nine Network television show The Voice to market its brand to the public.
One Queensland builder, Richard Kratochwil, told the AFR he lost $100,000.
“I’m not a sophisticated investor. This is the thing. I’m a bloody builder, an average joe,” he said.
“This is the first time I bought shares in my life outside of my superannuation.”
Guvera attempted to raise even more money from retail investors through an IPO, but the ASX blocked the float last year after a blaze of criticism about the company.