Court decides who is a “habitual investor”

The District Court has provided the first detailed decision on who can be “habitual investors” under the Securities Act 1978.  Habitual investors can invest in non-public offers of securities without receiving an investment statement. 

While the conclusion largely confirmed conventional wisdom on who is a habitual investor, aspects of the judgment would rule out some individual investors previously thought to meet the criteria, particularly those with only several years of active investment. 

The case involved Mr McEwan, promoter of the Investors Forum NZ Limited property investment seminars, who was prosecuted for breaches of the Securities Act. 

Mr Gale, the Regional Development Co-Ordinator for the Investors Forum, marketed the Forum’s products in the Otago and Southland regions.  Mr Gale and his wife invested in various property developments promoted by Investors Forum on the basis of being habitual investors.  The Gales’ joint investment application detailed seven investments over a period of 10 years.  It was initially declined, but was subsequently accepted after the disclosure of two further property investments.  

Ultimately the Judge decided the Gales were not habitual investors, but that Mr Gale (and not his wife) was selected otherwise than as a member of the public. 

The Judge considered “habitual” means “constant” or “continual”.  The following factors were relevant to the assessment of whether an investor was a habitual investor:

  • the period of time spent investing - investing over a four or five year period was found to be not sufficiently long to say the Gales were in the business of investment;

  • the number of investments;

  • the nature of the investments or transactions;

  • possibly the amounts of money involved; and

  • the success or otherwise of the investments. 

Mr McEwan claimed he received legal advice setting a low threshold on who could be a habitual investor.  The Judge doubted his evidence on the advice he received. 

Another interesting aspect was that Mrs Gale was treated differently than her husband.  She was held to be a member of the public and was not considered to be tainted by association with her husband even though they were making a joint investment.

Please contact Tim Williams or Penny Sheerin if you would like further information on this case or on securities offerings generally.

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Related topics: Funds, KiwiSaver & superannuation; Securities

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