Experts critique Federal Government’s revision of the Sophisticated Investor Test

The Real Estate Institute of Queensland (REIQ) has raised concerns about the Federal Government’s proposed amendments to the Sophisticated Investor Test (SIT), warning that such adjustments could negatively affect start-ups and small to medium Commercial Property Investment Funds.

The current criteria for being considered a ‘sophisticated investor’ involve possessing an annual income of $250,000 for two consecutive years or accruing net assets of $2.5 million, allowing such investors to allocate funds to companies not listed on the stock exchange, including start-ups and Commercial Property Trusts.

Now, with the government contemplating a raise in the financial benchmarks for sophistication to $450,000 of income and $4.5 million in net assets, those previously meeting the requirements and having access to asset classes with potentially higher returns might be sidelined.

Antonia Mercorella, CEO of the REIQ, expressed the organization’s firm opposition to such changes, which could divert critical investment from Queensland. “By increasing the threshold and shutting out investors, the Government is putting Australia’s emerging proptech industry at risk,” Mr Mercorella said. Notably, with Australia ranking 87th for economic complexity in the OECD, there is pressure for diversification beyond the heavy reliance on mining. “To remain relevant, our Government needs to ensure that the Australian economy is diversified,” Mercorella elaborated. The CEO pointed out the difficulty Queensland faces in attracting investment and the importance of supporting proptech start-ups in the region by safeguarding their capital access avenues. Indeed, the state’s venture capital landscape seems precarious, with a mere 11 Incorporated Limited Partnerships registered in Queensland from 2019 to 2021.

The prospective tightening of the SIT could also impinge on the fund-raising capabilities of Commercial Property Investment Funds, stifling competition within the Commercial Property sector.

Peter Schravemade, Managing Partner of REACH Australia, added his perspective on the matter, suggesting that the government’s approach lacked foresight and could bring about broader economic repercussions. “The proposed modification recommended by the current government for sophisticated investors is short sighted and is likely to have widespread repercussions for companies going through the start-up and scale up phases of business,” Mr Schravemade said. REACH Australia is advocating for possible alternative measures that strike a balance between investor protection and fostering the nation’s enterprising spirit.

Ms. Mercorella wrapped up the discussion by questioning the selective nature of the government’s approach towards investments, pointing out inconsistencies in its policy. “The SIT does not apply to individuals looking to take risky investments in small-cap ASX listed companies nor does it apply to high-risk endeavours such as gambling,” she said. She urged a re-evaluation of the policy that could potentially isolate strategic asset classes such as start-ups and Commercial Property Trusts.