This paper is intended to provide an in-depth analysis of the statutory provisions, regulations and rules that form the basis of the regulatory regime governing the sale of interests in thoroughbred horses for racing purposes and the subsequent operation of those schemes.
People who engage in this activity (known as “syndication”) as promoter or seller typically acquire horses, either at public auction or by private treaty, with the intention of reselling them by offering interests. They typically advertise on websites, various TV channels dedicated to racing, and in various newspapers and industry journals, asserting:
- the superior quality of the horses and their prospects of winning races (prize money);
- that the price of the interest(s) represents value for money;
- that the promoter has skill, expertise and a track record of selecting and syndicating horses that have progressed to winning races; and
- that the nominated trainer is a successful trainer of winners.
Some promoters have an exclusive arrangement with a trainer, while others place their horses with different trainers. A significant number of trainers also act as promoters.
WHY THE NEED FOR REGULATION?
Promoters predominantly target members of the public who have little, if any, prior ownership experience. Their lack of product knowledge and varying motivations to invest adds to investment risk and highlights the necessity for an appropriate disclosure regime. Market integrity is also important for promoting the depth of market necessary to attract investors.
WHY ASIC?
The regulatory regime governing this activity is founded upon the provisions of the Corporations Act 2001 (“the Act”) relating to managed investment schemes and involves interaction between the Australian Securities & Investments Commission (“ASIC”) and the Principal Racing Authorities of the various states and territories, as lead regulators.
WHAT IS A MANAGED INVESTMENT SCHEME?
Non-lawyers tend to associate the phrase “managed investment scheme” and its prefix “MIS” with investment schemes that are designed to invest in securities and other traditional investments. However, it is established law that the meaning given to that term by the Act is deliberately wide and designed to catch virtually all arrangements targeting collective investment and would, by itself, catch virtually all business models and structures.
The statutory provisions which govern the requirements of ASIC to carry out activities concerning such schemes (and the restrictions on promoting them) have broad application and have been held to cover such diverse activities as film, agriculture, mortgage funds, property development, sports betting, thoroughbred horse breeding and racing, etc. These types of managed investment schemes can be distinguished from the limited asset classes that have been exempted from the regime because they are considered “non-speculative” and for “personal use”, such as time share resorts, luxury car and boating clubs.
Under the Act, any person (promoter) who is “carrying on a financial services business” [“dealing is a financial product” (which includes the “issuing”, “underwriting” and “disposing” of interests in any managed investment product), or “operating a registered scheme”], must hold an Australian Financial Services Licence (AFS Licence) or be an Authorised Representative of a licensee, and the scheme must be registered, subject to specific statutory exemption or ASIC relief granted administratively (e.g ASIC Instrument).
A distinction is made between “retail clients” and “wholesale clients”. Generally, the consumer protection provisions will only apply to “retail clients”, as it is recognized that “wholesale clients” (including professional and sophisticated investors) do not require the same level of protection, as they are better informed and better able to assess the risks involved in financial transactions. A financial product is provided to a person as a “retail client” if it is not provided to the person as a “wholesale client”. To be treated as a “wholesale client”, the investor must satisfy a wealth, occupation or other threshold test.
The advertising or public promotion of “financial products” (that are managed investment products) is permitted only in relation to those offers of interests that require a Product Disclosure Statement (“PDS”) and a PDS is available, or where participation is available only to “wholesale clients”.
WHO DOES THE REGULATORY REGIME APPLY TO?
The regulatory regime applies to any person (promoter) who is in the business of dealing in interests in racehorses, as virtually all arrangements (typically co-ownership, partnership or unit trust arrangements) between 2 or more people owning or leasing a racehorse, established in accordance with the ARR will, prima facie, satisfy the definition of a managed investment scheme.
WHAT OWNERSHIP ARRANGEMENTS ARE EXCLUDED FROM THE REGULATORY REGIME?
Any arrangement between 2 or more people owning or leasing a racehorse established [as a one-off scheme] by a person who is not in the business of dealing in interests in such schemes will, prima facie, be a “private” scheme not subject to regulation under the Act, provided it has no more than 20 members.
WHAT IS ASIC’S APPROACH TO REGULATION?
While ASIC has responsibility for administering the Act, it has consistently exercised its discretionary powers and granted conditional relief for small-scale schemes from the specific statutory provisions relating to scheme registration.
ASIC’s approach to the regulation of horse breeding and horse racing schemes is set out in the following documents:
- ASIC Corporations (Horse Schemes) Instrument 2016/790 issued by ASIC on 25/08/2016 (as amended on 16/12/2016) (ASIC Instrument), which revoked and replaced
- CO 02/319 [Horse racing] issued by ASIC on 15/02/2002 (as amended), which revoked and replaced
- CO 98/65 [Horse racing] issued on 14/07/1998, which revoked and replaced
- Policy Statement 20 – Horse racing schemes, issued on 04/05/1992 (as amended).
- Explanatory Memorandum for ASIC Corporations (Horse Schemes) Instrument 2016/790 issued on 26/08/2016
- ASIC Regulatory Guides
- Regulatory Guide 91 (“RG91 [2016]”)– Horse breeding schemes and horse racing syndicates, which superseded
- RG 91 [2012], which superseded
- RG 91 [2007].
- RG 97 [2017] – Disclosing fees and costs in PDSs and periodic statements, which superseded
- RG 97 [2011], which superseded
- RG 97 [2007].
- RG 168 [2011] – Disclosure: Product Disclosure Statements (and other disclosure obligations), which superseded
- RG 168 [2010], which superseded
- RG 168 [2007].
- Regulatory Guide 91 (“RG91 [2016]”)– Horse breeding schemes and horse racing syndicates, which superseded
The purpose of the ASIC Instrument (as was the case with the previous Class Order and Policy Statement) is to relieve those small-scale schemes which comply with the terms of the ASIC Instrument from otherwise having to comply with the statutory provisions requiring registration.
The scope of the relief is limited to the terms of the ASIC Instrument.
ASIC has reappointed the Principal Racing Authorities of the various states and territories as lead regulators to administer the terms of the ASIC Instrument within their respective jurisdictions.
If you have not already read these documents, it would be advantageous for you to do so before proceeding to read this paper.
WHAT ARE THE BASIC REQUIREMENTS OF THE CURRENT REGULATORY REGIME?
While the statutory provisions and regulations are complex, the basic requirements of the regulatory regime, and how it operates, is simply explained as follows:
1. THE RULES (SPECIFYING EXPECTED BEHAVIORS AND OUTCOMES)
Requirement for Schemes to be registered and the exceptions
Under the Act, any horse racing scheme established by a person (promoter) who is in the business of dealing in interests in such schemes MUST be registered as a managed investment scheme, UNLESS it qualifies [and is established] as an unregistered scheme that is:
(b) a wholesale scheme; or
(c) a lead regulator approved (ASIC Instrument compliant) syndicate.
Investors who are “retail clients” are not permitted to participate in a wholesale scheme.
Requirement for promoters and managers to be licensed
Promoter
Under the Act, any horse racing scheme established by a promoter will, prima facie, fall WITHIN the requirement for registration under section 601ED, so the promoter MUST hold an AFS Licence or 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 is relieved by statutory exemption or the terms of the ASIC Instrument from the requirement to be registered.
Manager
The manager of a horse racing scheme that is either a “registered” scheme, or an “unregistered” scheme where participation is available only by “personal offer”, or to “wholesale clients”, MUST hold an AFS Licence.
The manager, if not the promoter, of a Horse racing syndicate that is the subject of a PDS approved by a lead regulator (Principal Racing Authority) may not require a licence, subject to the terms of the ASIC Instrument.
2. THE STANDARDS (USED AS BENCHMARKS FOR COMPLIANCE)
Disclosure of key information
The promoter of an “offer of interests” in a horse racing scheme that is either a registered managed investment scheme, or a lead regulator approved (ASIC Instrument compliant) syndicate, MUST disclose to prospective investors who are “retail clients” all key information required to enable them to make an informed decision whether or not to invest. The information is generally required to be set out in a PDS, which must be provided to prospective investors prior to sale.
The promoter MUST include with the key information the agreement which will govern the future ownership of the horse(s) the object of the scheme, including provisions dealing with the appointment of a manager and a trainer, and arrangements for the payment of operating expenses and distributions of income (prize money) earned, if any.
Handling of Application Moneys and transfer of ownership
The promoter MUST deposit all
application money paid by investors into a designated application moneys trust
account until the legal and beneficial ownership of the horse(s) is transferred
to them, unencumbered. If an “offer of interests” is not fully subscribed, the
promoter MUST refund to investors all application money received, together with
any interest earned.
3. THE SANCTIONS (APPLIED FOR NON-COMPLIANCE WITH THE RULES)
There are serious consequences for promoters who engage in this activity in contravention of the Act and the ARR. Enforcement action may include prosecution and the imposition of punitive penalties, or orders requiring the payment of compensation.
4. THE ADMINISTRATIVE PROCESS (TO ENFORCE THE RULES AND ADMINISTER SANCTIONS)
ASIC is responsible for administering the Act, including surveillance activities to promote compliance, investigating suspected non-compliance, and prosecuting breaches.
ASIC has appointed the Principal Racing Authorities of the various states and territories [as lead regulators] to administer the terms of the ASIC Instrument within their respective jurisdictions.
Each Principal Racing Authority (within its jurisdiction):
- is responsible for administering the ARR; and
- has the capacity to investigate and prosecute any person it suspects of breaching the ARR;
AND as a lead regulator under the ASIC Instrument:
- is responsible for administering the syndication activities of promoters within the terms of the ASIC Instrument; and
- has the capacity to refer to ASIC for investigation and prosecution, any person it suspects of breaching the Act. In fact, it is probably fair to say that ASIC has an expectation that each Principal Racing Authority will undertake appropriate surveillance activities and refer suspected breaches of the Act to it for further investigation and prosecution.
GENERAL
While the current regulatory regime has been in place since 2002 (with very little change under the current ASIC Instrument) and is similar in effect to the old “prescribed interests” regime which operated from the early 1990’s, there continues to be a significant level of conflicting opinion amongst industry participants (including various Principal Racing Authorities) in relation to its application. The writer hopes that the conclusions set out in this paper will provide clarification.
Various statutory provisions, regulations and rules of racing are quoted in full for the convenience of readers.