Macrossans Lawyers Brisbane law firm

Macrossans Lawyers - Autumn 2006

The Australian Securities and Investment Commission (ASIC) has been cracking down on companies using mezzanine finance.  This article summarises the issues.

What is Mezzanine Financing?

Mezzanine Financing is often raised by property developers to fund up to 45% of construction projects. 

It is the middle "slice" of the money lent through unsecured company loans.

The first source of funds is usually borrowed from a bank or financial institution, as a secured creditor.  The third slice of funds, which may be as little as 5% of project costs, usually comes from the developer itself.

The Risks

Investments using mezzanine finance offer higher interest rates than property and fixed deposits – but they have less security and pose greater risk.

Many high yield debentures are targeted at small investors such as retirees and self managed super funds.   

Lack of Disclosure

While some companies successfully use mezzanine finance to fund their projects, ASIC is very concerned companies are not disclosing the high risks to potential investors.  It's surveillance report in February 2005 on high yield debentures identified that many of the prospectuses contained misleading or deceptive statements. 

Advice for Investors

Only consider high return debentures, if you can afford to risk losing the investment.  Always review the prospectus carefully, paying attention to the nature of the securities offered and where the funds are going to be used. 

If you cannot afford to lose your investment, you should seek a low risk, low return investment. 

For further advice, please contact Robin Lonergan on (07) 3292 9710 or at This Email address is being protected from spam bots, you need JavaScript enabled to view it .

A Case Study:  Westpoint

The Westpoint Group of Companies raised mezzanine finance for CBD construction projects throughout Australia by issuing unsecured promissory notes (or unsecured loans) to investors.

The minimum investment was $50,000, with many licensed financial planners promoting the schemes, which had little disclosure about the risks.

Since 2004, ASIC has been investigating the Westpoint Group of Companies.

In February 2006, the Westpoint Group of Companies collapsed when several construction projects were placed in liquidation.  As a result, Westpoint owes more than $300 million to about 4000 investors.  While secured creditors may be paid, most unsecured creditors face losing their investments.

Matters are still before the Supreme Court of Western Australia in relation to whether the method of raising funds by promissory notes is regulated.  ASIC maintains Westpoint should have disclosed the risks, while Westpoint argue that it is not regulated and they were not legally required to fully disclose the risks to investors. 

If you require further advice visit ASIC's website www.asic.gov.au or contact Tony Mylne on 07 3292 9715 or at This Email address is being protected from spam bots, you need JavaScript enabled to view it .