Vic Govt weighs in against ‘sophisticated investor’ changes

The Victorian Government has warned that proposed changes to the sophisticated investor test could have a significant detrimental impact on the start-up and venture capital eco-system.

According to the state government, more than $1 billion in private capital investment could be at stake and has argued that as many as 70% to 90% of angel investors would no longer qualify as “sophisticated’ investors.

In a submission filed with the Parliamentary Joint Committee on Corporations and Financial Services, the Government said LaunchVic’s suite of programs aimed at upskilling founders and investors, and supporting startup infrastructure, has activated an estimated $1.035 billion in private capital investment in Australian startups since 2016.

“Of this capital, a significant portion has been sourced from angel investors and high-net worth individuals who qualified as Sophisticated Investors under the current settings,” it said.

“Proposed significant increases to the wealth thresholds associated with the Sophisticated Investor test could have a detrimental impact on the startup and VC ecosystem

“VC is critical for startup creation and development, and often comes in the form of angel investment. Angel investors are usually the first source of external financing for startups and pair their financial support with equally valuable mentoring and business advice.

“The impact of angel investors is even more substantial when they invest as part of formalised angel groups, which offer larger pooled investments along with access to a broader range of business expertise.

“Typically, angel investors are required to qualify as Sophisticated Investors to access startup investment opportunities by meeting either of the following wealth thresholds:

• Income threshold – a pre-tax income in each of the previous two financial years of $250,000 or more; and
• Asset threshold – net assets of at least $2.5 million (inclusive of the family home).

“The Victorian Government understands that there has been a proposal, including to the Australian Treasury’s recent review into Managed Investment Schemes, to adjust the wealth thresholds associated with the Sophisticated Investor test to reflect inflation since the thresholds were set in 2001.

“Based on this proposal, the income threshold could increase to $450,000 per annum and the asset threshold could increase to $4.5 million (inclusive of the family home).”

“Various Victorian startup and innovation stakeholders have raised concerns to the Victorian Government about such a significant increase in these thresholds. This has included specific concerns relating to the increases precluding would-be investors from participating in the ecosystem – restricting the ability of startups to access capital. This would be exacerbated in the absence of any alternative arrangements being introduced to limit these unintended consequences on startups and innovation outcomes.”