Formal warnings have been issued to seven businesses raising millions for property schemes by making "non-compliant" documents for wholesale property investment offers.
Te Mana Tātai Hokohoko, the Financial Markets Authority, released findings of its almost year-long investigations into the often high-risk schemes, finding several conduct concerns in wholesale property investment and issuing seven formal warnings.
It named Black Robin Equity and Westwood Terraces BRE, Du Val Capital Partners and Du Val BTR GP, E+O Property Syndication, Jasper NZ Investments, Provincia Property Fund, Williams Corporation Capital Partnership GP and Wolfbrook Capital.
The authority demanded information from 23 entities, probing advertising, offer documents and process documentation.
"The FMA's most significant findings related to the use, confirmation, and acceptance, of eligible investor certificates," it said today, adding that some certificates were not confirmed by financial advisers, accountants or lawyers as is required, while other certificates were confirmed and accepted by offerors with no grounds or the grounds did not relate to the matters certified.
"Insufficient grounds included the sale of a farm, owning a term deposit or KiwiSaver, having a rental property portfolio, making substantial profits from selling houses, and "experience in investment," the authority said.
The probe came into property-related offers after more complaints and concerns about how such wholesale offers were being promoted and whether the appropriate investors were being targeted and accepted.
The authority now wants action from the professional organisations of lawyers, accountants and financial advisers.
It also found several practices it considers may increase the risk an investor may be misled, including:
• Offers promoted through a broad range of advertising channels, including through social media, rather than targeting experienced investors;
• Promotional material promoting high returns and low risk or ignoring risk;
• Offerors using digital advertising strategies, such as search optimisation, that may target non-expert investors (for example, promotions for wholesale property development projects targeting advertising at people using search terms such as "Sharesies" and "term deposit");
• Promotional materials that were not clear the offer was only available to wholesale investors;
• Some instances of aggressive or hard-sell techniques, although this did not appear to extend to investors being pressured to self-certify as eligible investors.
Paul Gregory, acting capital markets director, said: "The wholesale investor exclusion is intended to allow offerors to make offers to expert investors without having to provide the disclosure designed to inform and protect non-expert investors. However, our review has found practices in the market which have allowed this exclusion to extend to people with little or no investment experience, some citing KiwiSaver or term deposits as grounds for supporting their expertise".
The authority was "highly concerned" with the conduct of some offerors and the lawyers, accountants and financial advisers confirming eligible investor certificates," Gregory said.
It also published a report on its findings, setting clear expectations for the industry, including when an eligible investor certificate is complete and can be relied on.
"The industry should consider how our findings, and the warnings arising from them, could help improve how they promote offers and target and accept investors. The FMA will continue to scrutinise the wholesale property investment sector, especially given the volatile market environment affected by rising interest rates and falling property prices," Gregory said today.
"We urge all investors to carefully consider their ability to understand and assess the risk of investments they are offered, or seek independent and professional advice, before signing an eligible investor certificate.
"Potential investors should be asking themselves, 'Is 8 per cent, 10 per cent or even 15 per cent a good return relative to the risk of the investment, and am I in a position to be able to properly assess that risk?' And if that seems tough, perhaps the potential investor should get expert help or reconsider whether the investment is appropriate for them," Gregory said.
Last year, Gregory expressed concern about the rise of the new financial instruments to raise money to buy properties.
So the authority demanded property developers with wholesale deposit-taking funding arms supply it with the names of everyone who invested money - and those who didn't.
The industry probe, announced late last year, is into the relatively new sector which takes money from qualified or wholesale investors, estimated to have around $300 million of people's funds.
Gregory said last year: "We have become increasingly concerned about wholesale offers spreading into mainstream advertising, especially through social media, where the notion highly experienced investors are the target market becomes questionable. We expect entities relying on the wholesale exclusion to learn from this case and reflect on their own marketing practices."
In addition to advertising, the authority was going wider.
"It has confirmed previous public signals that it will also be looking at industry-wide use of the wholesale exclusion and, in particular, if the self-certification exclusion is being used appropriately," Gregory said then.
Helena Lewis, the authority's head of disclosure and market conduct, wrote to businesses in the sector in November seeking client names.
She asked for everyone who had put money into the schemes but also those who "responded to any of the offers but did not purchase any financial products".
The reasons why they didn't invest were also sought.
Lewis required "details of all wholesale investors who have purchased financial products under the offers, including full name, contact details, date and amount of investment, the reason why they qualify as a wholesale investor and copies of all information supporting the reason why they qualify as a wholesale investor".