Beware directors and professional advisors – personal liability can await those involved in raising capital in a non-compliant way

A Federal Court case shows the perils of being involved in an investment fund which is established and promoted without an AFSL, and without experienced, independent oversight. In addition, it highlights the risk of personal liability to people involved in a misleading offer document (including lawyers and accountants), as well as the fact that using disclaimers will not cure otherwise deficient, misleading material.

Investors versus The Property Mentors

We recently wrote about a Federal Court decision involving the Mayfair 101 Group, which demonstrated how laws against misleading and deceptive conduct apply to marketing materials directed at wholesale investors. Moreover, it showed how directors and others can be held personally liable for misleading material.

Now, we examine a different Federal Court case that involved yet another property investment promoter, The Property Mentors, who didn’t hold an Australian financial services licence (AFSL).

The Property Mentors offered its members property education and “mentoring”, as well as access to property investment opportunities through what it called its “Armchair Development” system. As part of this, the group offered investment in a development at Secret Harbour, Western Australia, through an Information Memorandum (IM).

The IM represented a 12–15 month investment timeframe and returns in excess of 20% (up to 49.6%). Investors were told that plans and permits had been obtained. In reality, the project was not adequately funded, key approvals were outstanding, and the timeframe estimates were unrealistic. The development collapsed, leaving investors with substantial losses.

Investors took legal action against The Property Mentors and its two directors at the time, alleging the IM was misleading and deceptive and seeking damages.

The decision

In a win for the investors, the Federal Court found:

• The IM conveyed that the project would be completed within 12–15 months, when in fact construction could not commence until months later and the contract terms made completion within that period impossible.
• Investors were told to expect returns above 20%. However, errors and omissions in the IM’s profit calculations meant that the projected returns were fundamentally misleading.
• The Property Mentors owed investors a duty of care in preparing the IM. By publishing inaccurate projections and failing to disclose material risks, the company breached that duty.
• Various disclaimers in the IM and investor acknowledgements in the application form did not overcome the misleading statements in the IM.
• The two directors were “knowingly involved” in The Property Mentors’ misleading conduct regarding the timeframe representation. This made them personally liable to the investors, alongside the company.
• Investors were entitled to recover their full investment because of the misleading statements in the IM.

Takeaways

As can be clearly seen from the outcomes summarised above:

• Great care needs to be taken in preparing investment offer documents. Experienced professionals must be involved in preparing an IM and ensuring its content is properly scrutinised and verified. A professional trustee brings the necessary discipline and independent oversight to the process.
• The prohibitions against misleading and deceptive conduct apply to wholesale offer documents.
• Preparers of IMs also owe a legal duty of care to investors.
• Directors and others involved in preparing an IM (including potentially lawyers and accountants) can be found personally liable if the IM is misleading.
• Disclaimers and qualifiers will not fix misleading offer documents and other material provided to investors.
• It is crucial to ensure financial forecasts and calculations are independently reviewed and tested by an appropriate expert.

At MARQ Trustees, we take great care to ensure the necessary time and effort is put into the preparation of all offer documents, which are also subject to independent legal review and verification.