he Regulatory Regime governing the syndication of thoroughbred horses for racing purposes
Author: AB (Tony) Fleiter BEc., LLB – Principal, Macquarie Legal Practice
Postal Address: PO Box 299, NORTH SYDNEY, NSW, 2059 Telephone: +61 2 9235 2500; Facsimile: +61 2 9235 1511
Email: firstname.lastname@example.org; Website: www.maclegal.com
[First published December, 2008; Revised in August, 2012 and August, 2013]
Tony has 30 years’ experience specialising in the provision of legal, consultancy and compliance services to participants in the Australian thoroughbred horse industry and has a unique level of practical work experience within the industry.
Disclaimer: The information in this publication is of a general nature and is not legal advice intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received and or that it will continue to be accurate in the future.
Warning: This document is subject to Copyrightã. Copying any part of it is prohibited and is therefore illegal and may expose you to criminal and civil proceedings unless you have the consent of Macquarie Legal Practice and then the copy you make must be used only as permitted by the terms of the consent given.
This paper is not about the glitz and glamour of thoroughbred horse racing, but rather the horse trading activity known as “syndication” and the Regulatory Regime designed to promote and protect market integrity. This paper is intended to provide an in-depth analysis of the statutory provisions, regulations and rules that form the basis of the current Regulatory Regime governing the activities of persons (each a promoter) “offering” or “inviting” prospective investors to acquire fractional interests (“shares”) in thoroughbred horses for racing purposes (each a Horse racing syndicate) AND the subsequent operation of those syndicates. Promoters of shares in Horse racing syndicates typically acquire horses either at public auction or private treaty with the intention of reselling them by offering shares. They commonly advertise the offers on their own websites, on TV and in various newspapers and industry journals, asserting:
Ø the superior quality of the horses in which shares are being offered and their prospects of winning races;
Ø that the price of the shares represents value for money;
Ø that the promoter has skill, expertise and a track record of selecting and syndicating horses that have progressed to winning races; and
Ø that the nominated trainer is a successful trainer of winners.
Some promoters have an exclusive arrangement with a particular trainer, while others place their horses with different trainers. A significant number of trainers also act as promoters in their own right. 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.
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 Authority of each state and territory, as Lead regulators. The general public tends 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, the definition set out in 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 provisions of the Act that 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 MISs’ can be distinguished from the limited asset classes that have been exempted from the regime because they are considered to be “non-speculative” and for “personal use”, such as luxury boats and motor vehicles.
The provisions of the Act relating to MISs’ require that the promoter of offers of interests in such schemes be appropriately licensed and that such schemes be registered, subject to specific statutory exemption or Class Order relief. A distinction is made between “retail clients” and “wholesale clients”. Generally, the consumer protection provisions will apply only 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 client 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 promotion of “offers” or “invitations” to acquire shares is permitted only in relation to those offers that require a Product Disclosure Statement (“PDS”) and a PDS is available, or where participation is available only to “wholesale clients”.
The Regulatory Regime applies to the promoters of all public offers of shares in thoroughbred horses for racing purposes, as virtually all joint ownership arrangements, when established and operated in accordance with the requirements of the Australian Rules of Racing (“the ARR”), satisfy the definition of MIS prescribed by the Act and are subject to regulation. ASIC has set out its approach to regulating horse breeding and horse racing schemes in Regulatory Guide 91 [issued in 2012, replacing RG91 issued in 2007] (“RG91 ”). If you have not already read RG91 , it would be advantageous for you to do so before proceeding to read this paper.
While ASIC has responsibility for administering the Act, it has elected to exercise its discretionary powers and granted conditional relief from the specific provisions of the Act relating to “registration”, in the form of Class Order 02/139 – Horse racing syndicates [issued by ASIC on 14/02/2002 (“the Class Order”). Furthermore, ASIC has appointed the Principal Racing Authorities of the various states and territories as Lead regulators to administer the terms of the Class Order within their respective jurisdictions. The effect of the Class Order is to relieve those “offers” that comply with the terms of the relief granted by the Class Order from otherwise having to comply with the provisions of the Act requiring that they “syndicates” be registered as MISs’. The scope of the relief is limited to the terms of the Class Order.
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)
Any person (a promoter) who carries on a business of “offering” or “inviting” prospective investors to acquire shares in thoroughbred horses for racing purposes (each a Horse racing syndicate) must hold an appropriate AFSL authorizing the licensee to provide the services.
The manager of a Horse racing syndicate that is either a “registered” or “wholesale” MIS must hold an appropriate AFSL. 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) need not be an AFS Licensee.
A Horse racing syndicate must be registered as a MIS unless it is either:
(a) a private syndicate [non-commercial social group];
(b) the result of an “offer” or “invitation” to acquire shares by a promoter that does not require disclosure as a consequence of the shares being made available only:
(i) by “personal offer” under the 20/12 Rule; or
(ii) to “wholesale clients”; or
(c) the result of an “offer” or “invitation” to acquire shares by a promoter that complies with the terms of the relief granted by the Class Order. [In other words, the “offer” or “invitation” to acquire shares is the subject of a PDS approved by a Lead regulator].
(2) The Standards (used as benchmarks for compliance)
The promoter of a public “offer” or “invitation” to acquire shares 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 product disclosure document (PDS) that must be provided to prospective investors prior to the point-of-sale.
(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 and/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 and to detect non-compliant activity, as well as investigating suspected non-compliant activity 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 Class Order within their respective jurisdictions.
Each Principal Racing Authority (within its jurisdiction):
(a) is responsible for administering the ARR; and
(b) has the capacity to investigate and prosecute any person it suspects of breaching the ARR; AND
as a Lead Regulator under the Class Order:
(c) is responsible for administering the syndication activities of promoters within the terms of the Class Order; and
(d) has the capacity to refer to ASIC for investigation and prosecution, any person it suspects of breakching the Act. (In fact, it is probably fair to say that ASIC has an expectation that each Principal Racing Authority will undertake appropiate surveillance activities and refer suspected breaches of the ACT to it for further investigation and prosecution).