Criteria for determining whether or not BC3 should have been required to hold an appropriate AFSL under disclosed ASIC regulations
On Thursday, Dynamic Syndications obtained legal advice on the basis of the information, knowledge and detail we have of the BC3 modus operandi, whether or not BC3 should have been required to hold an Australian Financial Services Licence (AFSL) authorising it to promote and sell shares in thoroughbred horses for racing purposes.
The advice we obtained is as follows:
An appropriate assessment of whether or not BC3 Thoroughbreds was required to hold an AFS Licence to engage in the offering and selling of shares in thoroughbred horses for racing purposes, in the most simple of terms, is as follows:
1. Was BC3 in the business of offering and selling shares in thoroughbred horses for racing purposes?
Answer clearly is “Yes”.
2. Were the offers of shares of a nature that required BC3 to hold an AFS Licence?
In order to answer this question, one needs to consider if the offers were of shares in syndicates that fall within the definition of MIS? In other words:
(i) Were the members required to contribute money or money’s worth to acquire the share(s)?
Answer “Yes”
(ii) Were any of the members contributions to be pooled or used in a common enterprise (maintain, training and racing the horse) for the benefit of the members? [In other words, were the members to be liable to pay their proportion of costs and entitled to receive their proportion of any prize money?
Answer “Yes”
(iii) Were the members to have day-to-day control over the operation of the syndicate (whether or not they have a right to be consulted)?
Answer “No”.
Both in reality and under the Australian Rules Of Racing (ARR), the members were required to appoint and vest legal possession of the horse in a manager, who in turn is required to appoint the trainer, who under the ARR is deemed to be the agent of the manager.
Answer to Q2 clearly is “Yes”.
The other criteria set out in the RVL Promoters Policy Guide [Nov, 2011] is not considered relevant.
In Our Opinion:
Consequently, should BC3 have been required to hold an appropriate Australian Financial Services Licence (AFSL) authorising it to engage in the business of offering and selling shares in thoroughbred horses for racing purposes ? Our legal advice confirmed the answer was Yes.
As to whether a specific offer was then required to either be registered with ASIC as a managed investment scheme (MIS) or the subject of a Lead Regulator approved PDS, would depend upon elements of the specific offer, such as the number and value of the shares on offer.
It is unfortunate for the industry as a whole and specifically for investors; the BC3 business model was allowed to operate without regulatory intervention. There is little doubt that they were required to hold an ASIC licence and comply with ASIC guidelines either under a Full Managed Investment Scheme License (for promotions greater than $250,000) or by way of relief under the Class Order (by lodging a PDS for promotions under $250,000).
Had that taken place, investors funds would have been required at law to be deposited into a trust account and those funds must remain in trust on the investors behalf until the horse is either registered with the racing authority into the names of the investors or the promotion does not proceed, where under that circumstance, the funds must be returned to the investors in full, within 10 days of the promotion no longer proceeding.
Further, licenced syndicators are required to have their trust accounts audited annually and lead regulators are also permitted to do spot checks upon promoters, reviewing clients funds deposited into the trust accounts throughout the term of the promotion.
In addition, there are several further protections that all licenced syndicators are required to have in place that protect investors including:
1) Professional Indemnity Cover to protect the investors on each promotion
2) Surplus Liquid Assets ratio (SLA) that must be maintained at all times by all licensed syndicators, to ensure liquidity of the promoter should any actions be warranted
3) The accounts of each promotion must be maintained in a separate trust account specifically for that promotion.
4) Annual audited sets of accounts must be lodged with the lead regulator within 90 days of the close of each financial year.
5) The use of a Product Disclosure Statement (PDS) approved by the lead regulator for each individual horse promotion.
6) Access to the use of an independent and dedicated complaints system through statutory membership of the Financial Ombudsman Service Limited.
7) Access to complaints systems to the Lead Regulator being the Racing Authority of each state and access to ASIC complaints register
8) Protection under the Australian Rules of Racing to which licenced syndicators must comply and intervention by the Stewards would apply should any breach occur under the Bloodstock Industry Code of Practice and / or the Australian Rules of Racing.
With these safeguards in place for investors, the transparency and integrity of our industry is maintained and problems that lead to breaches or potential breaches are quickly identified.
For investors, its all about the process and ensuring there is at all times Full Disclosure which ensures that investors do receive what they pay for.
Our concerns moving forward are that there are several other high profiled industry operatives offering and selling shares in thoroughbred horses for racing purposes without an appropriate licence when they should be licenced. There is no reason to think that in the future, history can't repeat and therein lays the current challenge for the regulators and auction houses.
If investors are not using the services of a licenced syndicator, they place themselves at risk of any unscrupulous operators.
This is why it is vital that an education platform is established and maintained by State Racing Authorities, the Australian Racing Board, Aushorse and Auction Houses to enlighten potential investors to the comfort and surety of dealing with fully licenced promoters as compared to those that deal outside the boundaries of compliance and thus placing investors funds at high risk.
Further for industry confidence, it is vital that lead regulators in each state join forces and administer compliance under the same structure and take away uncertainty of differing interpretations at state levels to a Federal Law.
Dean Watt
Dynamic Syndications