An “offerof interests” in a managed investment scheme will normally require a PDS to ensure that prospective investors have all key information about the scheme to enable them to make an informed decision whether to invest. In certain circumstances, an issue of interests in a managed investment scheme can be made to investors without a PDS.
While the provisions of Chapter 6D [Fundraising] apply to securities generally, the provisions of Chapter 7 [Financial Services and markets] apply to financial products, or financial services generally, including interests in managed investment schemes.
Section 706 [Issue offers that need disclosure] provides that an offer of securities for issue needs disclosure under Chapter 6D unless section 708 [Offers that do not need disclosure], or 708AA [Rights issues that do not need disclosure], says otherwise.
Sections 708 and 708AA contain exemptions to the requirements to issue a PDS.
Sections 1012B and 1012C deal with obligations that require a regulated person to provide a PDS to any person who is a retail client when offering a “financial product” to the person; and section 1012D contains exemptions to the requirement to provide a PDS.
The relevant provisions of these sections are summarized below:
Section 1012B [Obligations to give Product Disclosure Statement – situations related to issue of financial products]:
- a regulated person must
give a retail client a PDS for a financial product if:
- they make an offer to issue, or arrange for the issue of, the financial product to the client;
- they issue the financial product to the client in circumstances where there it is reasonable to believe that that the client has not already received a PDS; or
- the client makes an offer to the regulated person to acquire the financial product by way of issue.
- The PDS must be prepared by the product issuer and given at or before the time when the regulated person either makes the offer, or issues the financial product to the client, or before the client becomes bound by a legal obligation to acquire the financial product pursuant to the offer. Section 1013A(1)
Section 1012C [Obligations to give Product Disclosure Statement – offers related to sale of financial products]:
- a regulated person must give a retail client a PDS for
a financial product that it has offered to sell to the client or that a retail
client has offered to acquire by way of transfer, if the sale or transfer:
- The PDS must be prepared by the seller [Section 1013A(2)] and given to the client at, or before, the time the regulated person makes the offer to sell the product, or where the client makes the offer, before the client becomes bound by a legal obligation to acquire the financial product pursuant to the offer.
Section 1012D [Situations in which Product Disclosure Statement not required]:
- where the client has already received an up-to-date PDS, or the regulated person believes on reasonable grounds that this is the case [Section 1012D(1)].
- for offers of products that the client already holds, where the regulated person believes on reasonable grounds that the client has received, or has access to (and the client knows that he or she has access to), all the information that a PDS would be required to include through an earlier PDS and any ongoing disclosures, in relation to managed investment products, through continuous disclosure [Section 1012A(2)]; or
- for small-scale offerings of managed investment and other prescribed financial products – e.g. personal offers that do not breach the 20/12 Rule etc.
“Personal Offers” under the 20/12 Rule
“Personal Offers” of interests in a managed investment scheme, where the promoter is compliant with the 20/12 Rule under section 1012E, do not require disclosure under Chapter 7. Similar provisions also appear in section 708(1) and apply to securities generally.
Section 1012E(2) provides that a “personal offer” of a “financial product” does not require disclosure, provided that the offer does not result in the number of purchasers to whom the products are “issued” exceeding 20, or the total amount raised from the “issuing” of the financial products in any 12 month period [20/12 Rule] exceeding $2 million.
Any “offer of interests” in an “unregistered” scheme, or schemes, to which the provisions of section 1012E apply, must be a “personal offer” within the meaning ascribed to that term by section 1012E(5).
Under the 20/12 Rule prescribed by the section 1012E, an “unregistered” horse racing scheme, or schemes, must not result in more than $2 million of interests being “issued” to more than 20 persons (including joint owners) in a period of 12 months. Furthermore, if the number of persons (including joint owners) to whom the interests are “issued” by the “issuer” at any time becomes more than 20, each scheme must be registered as a managed investment scheme within 12 months of that happening.
An “offer of interests” by a promoter to an existing client who has previously either purchased interests or indicated an interest in doing so would be likely to satisfy the definition of “personal offer” [Section 1012E(5)].
Section 1012E states:
“Small scale offerings of managed investment and other prescribed financial products (20 issues or sales in 12 months)
- This Section applies only to financial products that
- managed investment products; or
- financial products of a kind prescribed by the regulations made for the purpose of this paragraph.
- Personal Offers of financial products do not need a Product Disclosure Statement under this Part if:
- all of the financial products areissued by the same person (the issuer); and
- none of the offers results in a breach of the 20 purchasers ceiling (see subsections (6) and (7); and
- none of the offers results in a breach of the $2 million ceiling (see subsections (6) and (7);
- … to (4) …
- For the purposes of subsections (2) and (4), a personal offer is one that:
- may only be accepted by the person to whom it is made; and
- is made to a person who is likely to be interested in the offer, having regard to:
- previous contact between the person making the offer and that person; or
- some professional or other connection between the person making the offer and that person; or
- statements or actions by that person that indicates that they are interested in offers of that kind.
- An offer to issue, or arrange for the issue of, a financial product:
- results in a breach of the 20 purchasers ceiling if it results in the number of people to whom the issuer has issued financial products exceeding 20 in any 12 month period; and
- results in a breach of the $2 million ceiling if it results in the amount raised by the issuer from issuing financial products exceeding $2 million in any 12 month period.
- An offer by a person to sell a financial product:
- results in a breach of the 20 purchasers ceiling if it results in the number of people to whom the person sells financial products issued by the issuer of that financial product exceeding 20 in any 12 month period; and
- results in a breach of the $2 million ceiling if it results in the amount raised by the person from selling financial products issued by the issuer of that financial product exceeding $2 million in any 12 month period.
- … to (11) …
- For the purposes of this Section, an offer of a financial product is an offer to:
- issue the financial product; or
- arrange for the issue of the financial product; or
- sell the financial product”.
Offer available only to “wholesale clients” (including “professional” and “sophisticated investors”)
An “offer of interests” in an unregistered managed investment scheme, where participation is available only to “wholesale clients”, does not require disclosure.
Chapter 7 contains tests in relation to specific products. A “wholesale client” is defined in section 761G(4) as a person who is not a “retail client”. Insurance and superannuation products are treated differently, but investors in other financial products can be treated as “wholesale clients” if they satisfy a wealth, occupation or other threshold test.
The “experienced investor” test in section 708(10) focuses on competence levels in securities generally, rather than specific products. It is the same as the “sophisticated investor” test in section 761GA which focuses on experience in relation to financial products or financial services generally. The class of “sophisticated investor” is intended to be a subset of “wholesale client”.
The “sophisticated investor” test in section 708(8) is of similar effect to the “wholesale client” test in section 761G(7).
A “wholesale client” is a person who:
- invests $500,000 more; or
- can provide a certificate (given in the last 6 months) from a qualified accountant stating that the person:
- has net assets of at least $2.5 million; or
- has a gross income of $250,000 for each of the last 2 financial years; or
- is otherwise a wholesale client within the meaning of section 761G.
Who can participate?
- wholesale clients [Section 761G] – a person who has aggregated net assets of $2.5 million or has aggregated gross income for each of the last two financial years of at least $250,000 a year. A qualified accountant must certify the person satisfies the criteria and such certification must be no more than two years old.
- professional investors [Section 9] – an investor who controls, or is the manager of, at least $10 million of investment in securities, or who has an AFS license [Section 761G(7)(d)].
- sophisticated investors [Section 761GA] – where an offer to a person is made through an AFS licensee, and the licensee is satisfied, on reasonable grounds, that the person to whom the offer is made has previous experience in investing in securities that allows them to assess:
- the merits of the offer;
- the value of the securities;
- the risks involved in accepting the offer;
- their own information needs; and
- the adequacy of the information given by the person making the offer.
Section 761G [Meaning of retail client and wholesale client] states:
“(1) For the purposes of this Chapter, a financial product or a financial service is provided to a person as a retail client unless subsection (5), (6), (6A) or (7), or Section 761GA, provides otherwise.
(2) For the purposes of this Chapter, a person to whom a financial product or financial service is provided as a retail client is taken to acquire the product or service as a retail client.
(3) If a financial product is provided to a person as a retail client, any subsequent disposal of all or part of that product by the person is, for the purposes of this Chapter, a disposal by the person as a retail client.
(4) For the purposes of this Chapter, the financial product or a financial service is provided to or acquired by, a person as a wholesale client if it not provided to, or acquired by, the person as a retail client.
General insurance products
… to (6) …
Other kinds of financial products
For the purposes of this Chapter, if a financial product is not, or a financial service (other than a traditional trustee company service) provided to a person does not relate to, a general insurance product, a superannuation product or an RSA product, the product or service is provided to the person as a retail client unless one or more of the following paragraphs apply:
- the price for the provision of the financial product, or the value of the financial product to which the financial service relates, equals or exceeds the amount specified in regulations made for the purpose of this paragraph as being applicable in the circumstances (but see also subsection (10); or
- the financial product, or the financial service, is provided for use in connection with a business that is not a small business (see subsection (12);
- the financial product, or the financial service, is not provided for use in connection with a business, and the person who acquires the product or service gives the provider of the product or service, before the provision of the product or service, a copy of a certificate given within the preceding 6 months by a qualified accountant (as defined in Section 9) that states that the person:
- has net assets of at least the amount specified in the regulation made for the purposes of this paragraph; or
- has a gross income for each of the last 2 financial years of at least the amount specified in regulations made for the purposes of this subparagraph a year;
- the person is a professional investor.
Offence proceedings – defendant bears evidential burden in relation to matters referred to in paragraphs (7)(a) to (d).
… to (11) …
(12) In this Section
“small business” means a business employing less than:
- if the business is or includes the manufacture of goods – 100 people; or
- otherwise – 20 people.”
Section 761GA [Meaning of retail client – sophisticated investors] states:
“For the purposes of this Chapter, a financial product, or a financial service (other than a traditional trustee company service) in relation to a financial product, is not provided by one person to another person as a retail client if:
- the first person (the licensee) is a financial services licensee; and
- the financial product is not a general insurance product, a superannuation product or an RSA product; and
- the financial product or service is not provided for use in connection with a business; and
- the licensee is satisfied on reasonable grounds that the other person (the client) has previous experience in using financial services and investing in financial products that allows the client to assess:
- the merits of the product or service; and
- the value of the product or service;
- the risks associated with holding the product;
- the client’s own information needs; and
- the adequacy of the information given by the licensee and the product issuer; and
- the licensee gives the client before, or at the time when, the product or advice is provided a written statement of the licensee’s reasons for being satisfied as to those matters; and
- the client signs a written acknowledgement before, or at the time when, the product or service is provided that:
- the licensee has not given the client a Product Disclosure Statement; and
- the licensee has not given the client any other document that would be required to be given to the client under this Chapter if the product or service were provided to the client as a retail client; and
- the licensee does not have any other obligation to the client under this Chapter that the licensee would have if the product or service were provided to the client as a retail client”.