Appendix B

RV Approved Promoter Policy issued [Nov 2011] & [Jun 2014] and Promoter Policy [Jan 2017]

This appendix is set out in 3 parts: 

Part 1 – Are the RV questions and accompanying statements set out in the RV APP [Nov 2011] and RV APP [Jun 2014] helpful in determining whether the owners will have day-to-day control over the operation of the syndicate?

Part 2 – Do the answers to the RV questions change any determination [based on the questions set out in Appendix C] as to whether a typical horse racing syndicate satisfies the definiton of a managed investment scheme?

Part 3 – Statements in relation to day-to-day control and advertising set out in RV PP [Jan 2017][1]

Part 1 – Are the RV questions and accompanying statements set out in RV APP [Nov 2011] and RV APP [Jun 2014] helpful in determining whether the owners will have day-to-day control over the operation of the syndicate? The answer to this question is “No”.

In November 2011, RV published a document APP [Nov 2011][2] in which it set out (for the first time) a series of questions it obviously considered would assist in determining whether the owners would have day-to-day control over the operation of a specific horse racing syndicate.

The questions are as follows:

“Q.1.  Does the promoter (or a person appointed by the promoter) manage the racing syndicate? 

Q.2.   Do the syndicate members pay a management/administrative fee (whether initial or ongoing)?

Q.3.   Does the manager make decisions relating to the distribution of prize money such as how and when prize money is distributed (including the withholding of prize money in the instance of defaulting or late-paying members)?

Q.4.   Does the manager manage a bank account associated with the syndicate?

Q.5.   Do the members pay a set monthly fee?

Q.6.   Does the manager make decisions relating to the racing of the horse without consulting the Owners?”

RV then states:

“If the answers to the majority of these questions is “yes”, then the syndicate will most likely be a MIS, but if the answer to the majority of the questions is “no”, then the syndicate will most likely not be a MIS”.

RV also published another document along with the RV APP [Nov 2011] titled Regulations of Promoters of Shares in Horses and Horse Syndicates, in which the following statement appeared on page 2 of that document: 

            “When the syndicate is jointly managed by its members then the definition most likely does not apply in which case no approval of the share promotion is required”.

In 2014 RV published a revised APP [Jun 2014][3] with a modified set of questions directed to the person who is considering selling shares in a thoroughbred horse for racing purposes, as follows:

“Q.1.  Do you, or a person appointed by you, intend to set up or bring together the group of investors?

Q.2.   Do you, or a person appointed by you, act as manager of the group of investors on an ongoing basis?

Q.3.   Do the investors pay a management or administrative fee (whether initial or ongoing)?

Q.4.   Does the manager of the investor group make decisions relating to the distribution of prize money such as how and when prize money is distributed (including the withholding of prize money in the instance of defaulting or late paying members of the group)?

Q.5.   Does the manager of the investor group handle a bank account associated with the investors?

Q.6.   Do the investors pay a monthly fee relating to the training and care of the horse directly to the manager of the investor group?

Q.7.   Does the manager make decisions relating to the racing of the horse without consulting the investors?”

RV then stated:

“If the answer is “yes” to the majority of the above questions, then it would usually follow that the MIS definition is met. When the syndicate is jointly managed by its members and the answer is “no” to the majority of the above questions, then the definition may not apply”.

“In any case, Racing Victoria will closely liaise with the promoter to determine whether the MIS definition is met. In most cases, provided the promoter is not promoting syndicates with system and repetition, any unique promotion will be permitted”.

RV also published in June 2014, a revised version of another document[4], in which the following statement appears on page 2: 

“When a person buys a share in a horse and does not have day-to-day control over his or her investment, then it’s possible that he or she has purchased a share in a MIS. To determine whether the promoter is offering a share in a MIS, the following questions must be asked: …”.

The RV questions relate to the third limb of the definition of a managed investment scheme, being the element of “day-to-day control over the operation of the scheme”.

The questions, together with the accompanying statements as to what, if any, conclusion should be drawn from the answers to those questions suggest a unique proposition – that if the terms of an “offer of interests” propose that:

• a person or persons other than the promoter (presumably the members) will appoint the manager;

• the members are not required to pay a management or administration fee;

• the members will:

• be invoiced directly by the trainer and other service providers for their proportion of operating expenses; and

• paid directly (via the stakes payment system) their proportion of prize money:

[as opposed to the manager establishing a syndicate bank account for the physical pooling of the members’ contributions to operating expenses and the receiving of income (prize money)]; and

• the manager will consult with the members before making significant decisions in relation to the horse and the scheme;

then these elements may somehow constitute the members having “day-to-day control over the operation of the scheme” and place it outside of the definition of a managed investment scheme. 

RV DOES NOT explain how it could entertain the notion that people who acquire an ownership or leasehold interest in such a scheme will have day-to-day control over its operation when they are required to appoint both:

• a manager[5], to manage the scheme (or certain aspects of it); and

• a licensed trainer[6], to take possession of the horse and to manage and carry out the day-to-day [routine, ordinary, everyday] activities required in order to care for, train and race it to best advantage, regardless of:

• the level of consultation with the manager and the members;

• how contributions towards the scheme’s operating expenses (including training fees and other expenses) are made; and

• arrangements for the apportioning and distribution of income (prize money earned, if any).

Note: in the case of schemes established as a result of licensed trainers dealing in shares/interests it is likely that the trainer will also act as the manager

[even if the trainer is not a member of the scheme]

.

With all due respect to RV, it appears that, when formulating its questions, it has failed to make the necessary distinction between “ownership”, “organisational control”, and “operational control” [actually-exercised] on a day-to-day basis. As a practical matter, circumstances where the members appoint a manager, who they are not required to pay, and the manager must consult the members before making significant decisions, may still be consistent with the members NOT having “day-to-day” control.

RV itself appears to have been unsure as to the merits of its questions, evidenced by the change in wording used in 2014 from that used in 2011 as to what, if any, conclusion could be reached if the answer is “no” to the majority of the questions. It has changed from [in 2011] “…then the syndicate will most likely not be a MIS” to [in 2014] “…then the definition may not apply”.

Furthermore, RV’s statement in the second paragraph immediately following the questions[7], implies that RV was acting to ensure that “…in most cases any unique promotion will be permitted”. This is contrary to the notion that there is a legislated definition of a managed investment scheme that needs to be objectively applied and satisfied. It confuses the policy role of exemption given by ASIC administratively.

Part 2 – Do the answers to the RV questions change any determination [based on the questions set out in Appendix C] as to whether a typical horse racing scheme satisfies the definiton of a managed investment scheme? The answer to this question is “No”.

Would it change any of the answers, or the conclusion, in Appendix C:

1. if the promoter, or a person appointed by the promoter, will act as the manager?

          Answer:  No;

• if a person appointed by the members will act as the manager?

          Answer:  No;

• whether or not the members pay a management or administrative fee?

Answer:  No;

• whether or not the manager makes decisions relating to the distribution of prize money, such as how and when it is distributed (including the withholding of prize money in the instance of defaulting or late paying members)?

           Answer:  No;

• whether or not the manager handles a scheme bank account?

          Answer: No;

• whether or not the members pay a monthly fee relating to the training and care of the horse directly to the manager?

           Answer:  No; or

• whether or not the manager makes decisions relating to the racing of the horse without consulting the members?

                 Answer:  No.

Conclusion

Consequently, the RV APP [2011] and RV APP [2014] questions are inconsequential in determining whether a specific promotion or syndicate satisfies the definition of a managed investment scheme or falls outside of the scope of the definition.

While it is appropriate to consider the elements which are the focus of the RV questions in their proper context as part of a broader analysis of the whole of the proposed syndicate [its structure and modus operandi] to determine whether it will satisfy the definition of a managed investment scheme, it is inappropriate to consider only those elements in the context in which they appear in the RV documents. This has the potential to create confusion in the minds of industry participants as to their significance which is avoided if they are included as part of a broader analysis.

The determining criteria of a managed investment scheme can only be the elements of the legislated definition, complimented by the principles established by the case law, objectively applied[8].

It should be noted that neither ASIC in its RG [2016], RG [2012] or RG [2007], nor Racing NSW in its Guidelines for Promoters [2017] or [2013], have included anything like the RV questions.

It should also be noted that the RV questions do not appear in its RV PP [Jan 2017].

Part 3 – Statements in relation to day-to-day control and advertising set out in the RVL PPG [2017]

day-to-day control

The RV PP [Jan 2017][9] contains the following statement in part 1.3 [registration of a promoter with Racing Victoria]:

“What is an MIS?

If an offer is to be made publicly, typically via a published advertisement or an online promotion accessible to the general public (including an email to clientele), then the threshold question is whether the offer constitutes an MIS.

An MIS has the following features:

• people contribute money or money’s worth as consideration to acquire rights (“interests”) to benefits produced by the horse racing scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); and

• any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the horse racing scheme members people (the “members”) who hold interests in the horse racing scheme (whether or not as contributors to the horse racing scheme or as people who have acquired interests from holders); and

• the members do not have day-to-day control over the operation of the horse racing scheme (whether or not they have the right to be consulted or give directions). Another way to ask this question is whether or not the members have the right to be consulted or give directions about the day-to-day control over the operations; …”.

The original wording is the legislated definition. RV has deleted the lined through words and added the underlined words in an unconventional and questionable approach to statutory interpretation. Text, context and purpose are fundamental to statutory interpretation. It is inappropriate to change the text or context of a statutory provision before attributing a meaning.

Each limb of the legislated definition contains a statement in brackets beginning with (“whether…” or “whether or not…”) which is a modifier statement to the head statement. A modifier statement is intended to provide a default rule for resolving ambiguities in elements of the head statement[10].

In each case the modifier statement is a nonrestrictive modifier which provides additional [nonessential] information that DOES NOT [express an intention to] limit or restrict the legal meaning of an element of the head statement. Whereas a restrictive modifier is a statement that modifies an element of the head statement in a way that is essential to its meaning.

First limb

The head statement in the first limb of the definition “people contribute money or money’s worth as consideration to acquire rights (“interests”) to benefits produced by the scheme” is subject to the nonrestrictive modifier “(whether the rights are actual, prospective or contingent and whether they are enforceable or not”).

Consequently, [giving the word “whether” its ordinary meaning] the elements of the head statement apply whichever [regardless of which] of the alternatives mentioned in the modifier statement is the case. In other words, the rights being actual, prospective or contingent, enforceable or not, DOES NOT limit or restrict the legal meaning of the elements of the head statement.

Second limb

The head statement in the second limb of the definition “any of the contributions are to be 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” is subject to the nonrestrictive modifier “(whether or not as contributors to the scheme or as people who have acquired interests from holders)”.

Consequently, [giving the phrase “whether or not” its ordinary meaning] the elements of the head statement apply whichever [regardless of which] of the alternatives mentioned in the modifier statement is the case. In other words, the members being either contributors to the scheme or people who have acquired interests from holders DOES NOT limit or restrict the legal meaning of the elements of the head statement.

Third limb

The head statement in the third limb of the definition “the members do not have day-to-day control over the operation of the scheme” is subject to the nonrestrictive modifier “(whether or not they have the right to be consulted or give directions)”.

Consequently, [giving the phrase “whether or not” its ordinary meaning] the elements of the head statement apply whichever [regardless of which] of the alternatives mentioned in the modifier statement is the case. In other words, any right they (the members) may have to be consulted or give directions DOES NOT limit or restrict the legal meaning of the elements of the head statement.

With all due respect to RV, its amended wording to the third limb of the definition conveys a contrary meaning, as it would appear to imply that the right to be consulted or give directions may somehow modify an element of the head statement in a way that is essential to its meaning.

advertising

The RV PP [Jan 2017] also contains the following statement in part 1.6 [Licensed trainer requirements]:

            “Licensed trainers, comparable to unapproved operators such as breeders and owners, cannot publicly sell shares in horses without the necessary approval from ASIC and Racing Victoria.

However, the promotion of horse shares has traditionally been common practice. From an industry development perspective, Racing Victoria is committed to encouraging horse ownership through commercial syndications as well as through informal industry networks (such as friendship groups and close associates).

Racing Victoria permits a licensed trainer to publicly advertise a whole horse for sale. In this instance, any advertisement for such must remain generic and cannot contain statements such as (or similar to) “shares on offer” or “seeking partners to race” or “limited opportunities available”. Further, any advertisement should contain the whole costs of the horse (not specific to share value).”

The problem with this statement is that it has the potential to be interpreted by licensed trainers as a “green light” to deal in shares so long as they do not refer to shares in the advertising. While they typically refrain from referring to shares, they often add statements like “only 30% remaining”.

Regardless of the advertising, if the trainer qualifies as a “promoter” under section 601ED(1)(b) of the Corporations Act[11] then the trainer MUST either be the holder of an AFS licence or the authorized representative of a licensee. There is no statutory exemption or ASIC Instrument relief from this requirement to be licensed.

When the ownership of each horse is then registered with Racing Australia [either in the names of multiple owners or a syndicate with multiple members], the registered ownership will be further evidence of the trainer having been dealing in shares.

[1] RV Promoter Policy [Jan 2017]

[2] RV Approved Promoter Policy [Nov 2011]

[3] RV Approved Promoter Policy [Jun 2014]

[4] RVL Regulations of Promoters of Shares in Horses and Horse Syndicates [undated]

[5] AR635

[6] AR61

[7] RV APP [Jun 2014]

[8] see part 1 of this paper, at pages 7 to 25

[9] RV Promoter Policy [Jan 2017]

[10] see part 1 of this paper at pages 7 to 25. Also see Appendix C, at pages 68 to 72

[11] see part 2, at pages 26 to 38 of this paper