Caution Needed When Advertising to Wholesale Investors
On 30 June, the High Court upheld a Financial Markets Authority (FMA) order requiring property and development company Du Val Group (Du Val) to amend a social media campaign aimed at raising funds from wholesale investors. The case (Du Val Capital Partners Ltd v Financial Markets Authority) illustrates that care should be taken with the reach and detail of advertising when promoting to wholesale investors.
Du Val had been circulating a promotional video for a mortgage fund on social media with the aim of raising $100 million in secured lending at a fixed annual return of 10%. The FMA considered the video was likely to mislead or deceive because it contained the following representations:
- that the mortgage fund was “the best of both worlds” in that it was “secure” (suggesting low risk) but would financially outperform bank deposits, when in fact early-stage finance in a property development is not low risk; and
- that there were no fees associated with the investment, when in fact the general partner was entitled to 100% of the profit after the 10% fixed return to investors.
The FMA was also concerned that the widespread promotion of the advertising on social media and other platforms would attract inexperienced investors for whom the offer was unsuitable.
The FMA issued a direction order in October 2021 for Du Val to withdraw the promotional video and to refrain from making a number of specified statements in future advertisements for the mortgage fund. The FMA also prohibited Du Val from making comparisons between their property development projects and term or bank deposits or other low risk investments. Du Val appealed to the High Court.
The main issue in this case was who the target audience of the advertising was. Du Val argued that as only wholesale investors would invest in the fund, they were the target audience. The Financial Markets Conduct Act 2013 requires less extensive disclosure to wholesale investors because they are deemed to have sufficient investing experience, so they not require the same protections as retail investors. However, the High Court determined that the promotion of the advertising on news websites and social media likely meant that it was seen by both sophisticated and inexperienced investors. Crucially, the Court found that wholesale investors were not inherently more “sophisticated” than non-wholesale investors and would have a spectrum of experience. Therefore, the Court held that the FMA was not incorrect to find that, based on a broad marketing approach, the advertising was targeted at a wider range of investors requiring a greater degree of disclosure. The FMA’s order was upheld.
So, exercise caution with advertisements to wholesale investors, as “wholesale” does not necessarily mean “sophisticated”.