Structuring an unregistered managed investment scheme

Managed investments schemes are versatile investment structures which can be used to manage trusts (including cash management, property and equity funds) and a variety of other collective schemes (including agriculture, timeshare, mortgage, strata title or even film funds).

Regardless of the investment, the key components of any managed investment scheme (‘MIS’) are that:
(a) people contribute money or money’s worth to acquire interests to benefits produced by the scheme;

(b) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the members who hold interests in the scheme; and

(c) the members do not have day-to-day control over the operation of the scheme.

Companies are specifically excluded from the definition of an MIS.

An MIS must be registered with the Australian Securities and Investments Commission (‘ASIC’) unless:
(a) it has no more than 20 members (No More than 20 Member Exemption); or

(b) no issues of interests in the MIS required the giving of a product disclosure statement (a ‘PDS’) (Wholesale Exemption).

Registration of your MIS may be impractical, as it can be a cumbersome and demanding process with many onerous disclosure requirements and licencing obligations. However, if the right structure is employed, registration will not be necessary.

The basis upon which an MIS is exempt from registration is critical because under the Corporations Act, interests in schemes that are unregistered pursuant to the No More than 20 Members Exemption are not financial products and are therefore not regulated by the Corporations Act. However, interests in unregistered schemes which rely on the Wholesale Exemption are financial products for the purposes of the Corporations Act.

Under the Wholesale Exemption, the MIS will not be required to issue a PDS where:
(a) the offer is to wholesale investors; or

(b) the offer meets the ‘20/12 Rule’, which allows for the offer to a limited number of retail clients.

The 20/12 Rule allows an MIS to make personal offers to retail clients without a PDS if:
(a) the number of people to whom the scheme has issued/sold financial products is no more than 20 in any 12 month period; and

(b) the amount raised by the scheme from issuing/selling financial products is no more than $2 million in any 12 month period.

This essentially allows the issue of interests of up to $2 million to up to 20 investors who do not ordinarily invest as wholesale investors (i.e. retail investors).
Importantly, when calculating the 20/12 Rule, exclude other investors that do not need disclosure (i.e. wholesale investors). A scheme with unlimited wholesale investors and up to 20 retail investors (subject the personal offer requirement) does not need to be registered.
It is important to note that ASIC has the power to determine that a number of schemes, which are closely related, are in fact one scheme, which prevents a scheme manager from establishing multiple unregistered schemes which, collectively breach either of these ceilings. In such circumstances, it is an offence to make a recommendation, make an offer or accept and offer in relation to an MIS if the scheme needs to be registered but has not been.