Appendix C

Questions to determine if a proposed horse racing scheme will satisfy the definition of a managed investment scheme and if the person offering interests is required to be licensed

This appendix is set out in 2 parts:

Part 1 – Questions to determine if a proposed Horse racing scheme will satisfy the defintion of a managed investment scheme

Part 2 – Question to determine if the person intending to promote an offer of interests will require a licence

Part 1 – Questions to determine if a proposed Horse racing scheme will satisfy the definition of a managed investment scheme

Following is a set of questions, with answers, which the writer considers is appropriate to ask in relation to such an analysis:

1. First Limb

    1. Will a scheme result from the offer of shares?

      Answer: Yes.
    2. What is the nature of the scheme?

      Answer: The arrangement between 2 or more people (members) to own or lease a racehorse for the purpose of participating in the undertaking of caring for, training and racing it [the horse as a whole] to best advantage for the benefit of the group.
  2. Do people (members) contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not)?

    Answer: Yes.

    1. What is the nature of the members’ contributions?

      Answer: The members’ contributions to a typical horse racing scheme are:

      1. if a partnership or unit trust-based “investment” arrangement – money or money’s worth paid to or on behalf of the scheme; or
      2. if a co-ownership contract-based “enterprise” arrangement:

        1. the right to use their respective interests (in the horse) in the operation of a common enterprise that constitutes the scheme; and
        2. money paid to or on behalf of the scheme.
    2. What is the nature of the rights (interests) to benefits produced by the scheme?

      Answer: Each member, by their participation in the scheme, acquires the right:

      1. to participate in the undertaking of caring for, training and racing the horse (as a whole) to best advantage for the benefit of the members (as a group); and
      2. to receive any distributions of any income (net prize money) earned, in the same proportion(s) as the interest(s) held.

      Each member will typically receive a proportion of any income (net prize money) earned as distributions from either:

      1. the scheme’s designated bank account administered by the manager (after the total amount of net prize money is received into that account from the relevant principal racing authority); or
      2. the relevant Principal Racing Authority to such member’s nominated bank account.

      The method of distribution of net prize money is not significant in determining the nature of the benefit or the scheme.

2. Second limb

Are the members contributions pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the “members”) who hold interests in the scheme (whether or not as contributors to the scheme or as people who have acquired interests from holders)?

Answer: Yes.

How are the contributions pooled, or used in a common enterprise to produce financial benefits, or benefits consisting of rights or interests in property?

Answer: In the case of a scheme that is:

  1. a partnership or unit trust-based “investment” arrangement, by the members [partners or unitholders] agreeing to contribute money or money’s worth to or on behalf of the scheme to facilitate their pooled funds being used to:

    1. acquire the horse (as a whole) for use as the property of the scheme] and the benefit of the members (as a group); and
    2. pay operating expenses, including horse expenses; or
  2. a co-ownership contract-based “enterprise” arrangement, by the members agreeing to contribute to a common enterprise that constitutes the scheme:

    1. the right to use their respective interests (in the horse) in the operation of the common enterprise; and
    2. money [in the same proportion(s) as the interest(s) held] to pay operating expenses, including horse expenses;

    to facilitate their interests being managed in common [the horse as a whole] for the benefit of the members (as a group).

The fact that the members may agree:

  1. to making their ongoing monetary contributions to a designated bank account administered by the manager to facilitate payment of the scheme’s operating expenses; or
  2. to each member being invoiced directly by, and paying directly to, the trainer and other third-party service providers, their respective proportions of operating expenses;

is not significant in determining the nature of the contributions or the scheme. Regardless, the members contributions are either “pooled” [in the case of partnership and unit trust-based arrangements], or “used in a common enterprise” [in the case of co-ownership arrangements], to produce “financial benefits” [distributions of income (prize money), if any], or “benefits consisting of rights or interests in property” [the right to participate in the activity of racing the horse (as a whole), owned or leased by, the members, and to receive distributions of income].

3. Third limb

Do the members have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or give directions)?

Answer: No.

The realities of horse racing schemes [typically co-ownership arrangements] as they are designed to operate in practice are:

  1. each member’s interest in the horse the subject of the scheme [not the scheme itself so far as that is different] is inseparable from the interests of the other members; and
  2. the right of the members to manage their interests individually is:

    1. subordinated to the rights of the members collectively and the authority of the manager and the trainer [with actual possession and control of the horse as a whole] to operate the scheme on behalf of the group; and
    2. limited to voting on those matters specified in the relevant Owners Agreement or Training Agreement as requiring the members’ approval (by the requisite majority).

In other words, day-to-day “control in fact” over the operation of the scheme devolves to the manager and the trainer, being the people who, as the operators of the scheme, actually perform “… the acts which constitute the management of or the carrying out of the activities which constitute the scheme”.

Conversely, the members DO NOT have day-to-day “control in fact” over the operation of the scheme, prospectively viewed from the time when the arrangement is made. Practical necessity and the ARR require that the members:

  1. appoint a manager and a licensed trainer [with actual possession of the horse (as a whole)] and delegate to them the authority to operate the scheme on behalf of the members (as a group); and
  2. surrender day-to-day control over their interests to the manager and the trainer so that those people can manage the members’ interests in common [the horse as a whole] for the benefit of the group, (whether or not they have the right to be consulted or give directions).;

Part 2 – Question to determine if the person intending to promote an offer of interests will require a licence

Does the scheme fall WITHIN or OUTSIDE of the requirement for registration under section 601ED?

Under the Act:

  1. if the scheme falls OUTSIDE of the requirement for registration under section 601ED [because it qualifies as a “private” scheme], then the person who established it WILL NOT require a licence. To qualify as a “private” scheme, it MUST NOT require registration under section 601ED. In other words, the scheme MUST NOT have more than 20 members and the person who established it MUST NOT be in the business of dealing in interests in such schemes; and
  2. if the scheme falls WITHIN the requirement for registration under section 601ED [because it has more than 20 members or the person (promoter) who established it is in the business of dealing in interests in such schemes], then the promoter MUST hold an AFS Licence or be the Authorised Representative of a licensee before engaging in the activity.

A person who establishes a one-off “private” scheme [of no more than 20 members] to own or lease a racehorse may be able to avoid qualifying as a “promoter” under section 601ED(1)(b) and the requirement to be licensed [by being able to prove they WERE NOT in the business of dealing in interests in such schemes at the time the scheme was established].

A person who syndicates any significant number of racehorses each year will, prima facie, qualify as a “promoter” under section 601ED(1)(b) [by being in the business of dealing in interests in such schemes] and must be licensed before engaging in the activity.

There is no statutory exemption or ASIC Instrument relief from this requirement for a “promoter” to be licensed, regardless of whether a specific scheme may be relieved by statutory exemption or the terms of the ASIC Instrument from the requirement to be registered.