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 any proper determination of whether a specific offer of interests will result in an arrangement (scheme) between 2 or more owners or lessees of a thoroughbred racehorse that will satisfy the definition of a managed investment scheme[1].

  1. (1)     Will a scheme result from the offer of shares?[2]

     Answer: Yes.

  • What is the nature of the scheme?

Answer: The undertaking of caring for, training and racing the horse (as a whole) to best advantage.

  1. 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)?[3]

Answer:  Yes.

  • What is the nature of the members’ contributions?

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

  • if a partnership or trust-based arrangement – money paid to or on behalf of the scheme; or
  • if a co-ownership arrangement:
  • the right to use each member’s (ownership or leasehold) interest in the horse in (for the benefit of) the scheme; and
  • money paid to or on behalf of the scheme.
  • What is the nature of the rights (interests) to benefits produced by the scheme?

                          Answer: Each of the members, by their participation in the scheme, acquire the rights:

  • to participate in the undertaking of caring for, training and racing the horse (as a whole) to best advantage for the mutual benefit of the members holding interests in the scheme; and
  • to receive any distributions of any income (net prize money) earned, in the same proportion as that member’s interest in the scheme.

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

  • 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
  • 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.

  • 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)?[4]

Answer: Yes.

  • What is the nature of the common enterprise?

Answer: The arrangement between 2 or more people (members) to participate in the undertaking of caring for, training and racing the horse (as a whole) to best advantage for their mutual benefit.

  • How are the contributions pooled or used in a common enterprise?

                 Answer: In the case of a scheme that is:

  • a partnership or trust-based arrangement, by each member [partner or unitholder] agreeing to contribute money to or on behalf of the scheme, in the same proportion as that member’s interest in the scheme:
  • to facilitate the acquisition of the horse (as a whole) by the scheme to facilitate the horse (as a whole) being utilized in the scheme (the common enterprise) for the benefit of the members holding interests in the scheme; and
  • to pay the ongoing operating expenses (including training fees and other expenses) of the scheme; or

(b)     a co-ownership arrangement, by each member agreeing to contribute to or on behalf of the scheme:

  • the right to use their respective (ownership or leasehold) interests in the horse to facilitate the horse (as a whole) being utilized in the scheme (the common enterprise) for the benefit of the members holding interests in the scheme; and
  • money, in the same proportion as their respective interests in the scheme, to pay the operating expenses of the scheme.

The fact that the members may agree:

  • to pooling their ongoing monetary contributions in a designated bank account administered by the manager to facilitate payment of the scheme’s operating expenses; or

(b)     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” [as in (a)], or “used in the common enterprise” [as in (b)], 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].

  • Third limb

Will 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)?[5]

       Answer: No. Practical necessity and the ARR, including the Tor Rules, require that the members appoint both:

  • a manager[6], to manage the scheme (or certain aspects of it) [in accordance with the ARR and the terms of the Tor COA[7] or other agreement adopted by the members]; and
  • a licensed trainer[8], to take possession of the horse (as a whole) 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 [in accordance with the ARR and the terms of the Tor STA[9] or other agreement adopted by the parties], who is responsible for carrying out those activities 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 any income (prize money and owners’ bonuses) earned.

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].

Consequently, day-to-day control over the operation of any arrangement (scheme) between 2 or more people (members) owing or leasing a racehorse [established by a promoter or other person dealing in interests] will, prima facie, devolve to the manager and the trainer, as it those people who will perform “… the acts which constitute the management of or the carrying out of the activities which constitute the managed investment scheme” [as stated by Davies AJ in ASIC v Pegasus[10]].

Conversely, the members DO NOT have day-to-day control over the operation of the scheme whatever their right to be consulted or give directions [consistent with the principle established by Lord Sumption in his judgement in Asset Land v FCA[11]].

While the Owners agreement and Training agreement [both now mandatory under the Tor Rules] set out various powers and duties of the manager and the trainer AND specify that various decisions cannot be taken by the manager or the trainer without the approval of the requisite majority of the owners [e.g. change of trainer, gelding, relocation of the horse to race in another jurisdiction, race entry fee above a specified amount, veterinary treatment above a specified amount, power to deal with an owner who is in breach of payment obligations, retirement, winding up of the scheme etc.], this DOES NOT impute to the owners by their agents [the manager and the trainer] control in fact over the day-to-day operation of the scheme and place it outside of the scope of the definition [a principle confirmed by Buss JA in Burton v Arcus[12]].

Even if it is proposed, at the time when the scheme is established, that the members will be involved in making the significant decisions relating to the racing of the horse, this will not place the scheme outside of the definition of a managed investment scheme, because the manager and the trainer [as the operators of the scheme] will be the people responsible for implementing the decisions that are made.

Furthermore, the activities [and rights] of the individual must be distinguished from those of the group [a principle confirmed by Owen J in ASIC v Chase Capital[13]]. While the appointment by the members of a manager and a trainer to operate the scheme on their behalf is an example of them exercising their legal right collectively to control over the scheme and the horse (as a whole), the right of each member individually to control over the scheme, or their interests in the horse, is effectively limited to voting on those matters specified in the relevant Owners Agreement or Training Agreement as requiring the members’ approval. The terms of the Owners agreement may also restrict the members in dealing with their individual interests in the horse or require the sale of the horse (as a whole) if the members holding the requisite majority of scheme interests determine that it be sold. The member(s) holding half of the syndicate interests may also have a statutory right to apply to the court for an order requiring the sale of the horse (as a whole) and partitioning of the proceeds

This conclusion is supported by a detailed analysis of the role of the trainer, which is a complex one. 

The role of the Trainer

The trainer is:

  • a contracted provider of training and ancillary services (including materials and products);
  • the agent of the owner(s) or lessee(s) when procuring the services of other parties to provide services in relation to the horse while it is in the care and under the control of the trainer, including (without limitation) chiropractic care, dentistry, farriery and veterinary care, transportation, etc. [the trainer may also procure agistment, breaking-in and pre-training];
  • the authorized representative of the owner or lessee, or manager and all other nominees (if 2 or more owners or lessees), when nominating and accepting the horse for races and in most cases engaging the services of a jockey[14]; and
  • the person directly responsible under the ARR for informing the Principal Racing Authority of the location of the horse whilst it is in training and for presenting it at the races in a fit and proper condition to race (including being free of any prohibited substance or race day treatment).

The trainer is also a manager:

  • responsible for supervising the trainer’s own staff (including foreperson, stable hands, grooms, trackwork riders, racing manager, etc.) and all third-party service providers (including in most cases the jockey) in how they perform their duties and supply their services in relation to the horse; and
  • in the sense that the trainer is the directing mind of the scheme, with day-to-day control over those aspects of the scheme relating to the care, training and racing of the horse (as a whole) to best advantage, with it being necessary for the trainer to exercise his or her own professional skills, judgment and considerable discretion, when supplying these services and carrying out these activities, including formulating and implementing during each preparation:
  • a training program [including initial liability for payment of track fees] to bring it to racing fitness; and
  • a racing program [including initial liability for payment of most race nomination and entry fees] with the objective of racing it to best advantage;

notwithstanding any right of the owner(s) or lessee(s) to be consulted or give directions.

Clearly, the trainer is more than a mere agent who supplies professional services without assuming control of the asset of the scheme [a distinction made by Lord Carnwath in his judgement in Asset Land v FCA[15]]. The trainer is an operator of the scheme as the person [holding a trainer’s licence from the relevant Principal Racing Authority] who is:

  • given possession and control of the horse (as a whole); and
  • responsible for managing and carrying out the day-to-day [routine, ordinary, everyday] activities required in order to care for, train and race it to best advantage.

The significant role of the trainer in the day-to-day operation of the scheme is further evidenced by the fact that most operating expenses of the scheme will usually be reflected in invoices for services rendered [including materials and products supplied] by the trainer and other third-party service providers procured by the trainer to provide services in relation to the horse.

Conclusion

Practical necessity and the Australian Rules of Racing, including the Tor Rules, require all horse racing schemes (syndicates) to have a basic structure and modus operandi that, prima facie, satisfies the definition of a managed investment scheme.

There is no apparent basis upon which any person, including a licensed trainer, who is in the business of dealing in interests (shares) in racehorses, could successfully argue [in any legal forum] that the resultant syndicates, at the time when they were established, did not satisfy the definition. Any such argument would likely be an artificial construction of the documents to avoid the legislative intention of the statutory provisions.

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:

  • 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 WILL require a licence, or to be an authorized representative of a licensee, before engaging in the activity; and
  • 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.

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 require a licence, or to be an authorized representative of a licensee, 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.

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].

[1] see part 1.3.1 of this paper, at pages 16 to 18

[2] ibid

[3] ibid

[4] see part 1.3.2 of this paper, at pages 18 and 19

[5] see part 1.3.3 of this paper, at pages 20 to 25

[6] AR63

[7] The Tor Co-owners Agreement

[8] AR61

[9] The Tor Standard Training Agreement

[10] see part 1.2 of this paper, at page 12

[11] see part 1.2 of this paper, at pages 13 to 16

[12] see part 1.2 of this paper, at pages 12 and 13

[13] See part 1.2 of this paper, at page 11

[14] AR.63

[15] see part 1.2 of this paper, at pages 13 to 16