The syndication of thoroughbred horses for racing purposes is subject to regulation under the Corporations Act and the Australian Rules of Racing
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I have been acting for participants in the thoroughbred industry for 35 years and have heard the following words, or similar, many times, from aggrieved buyers of racehorses and shares in racehorses seeking advice as to their legal rights to rescind the bargain and claim restitution:
- “I contacted the guy after seeing an advertisement!”
- “I visited the stable and looked at the horse!”
- “He said he bought the horse at the sales on “spec” because he really liked it as a type and it had a good pedigree!”
- “He said the horse had vetted 100% sound!”
- “He said he would aim the horse at the rich 2YO races!”
- “He said the horse is a well-bred and will maintain its value as a stallion or broodmare even if it doesn’t win any races or prize money!”
- “He said he would look after everything and that I would receive a monthly invoice for my share of expenses!”
- “We simply agreed it was a deal, shook hands and I paid him!”
- “There is nothing in writing. I do not even have a receipt for my payment!”
- “He seemed like a nice guy and I trusted him!”
- “The monthly expenses are a lot more than he said they would be!”
- “The horse is a dud!”
- “The bastard has conned me and ripped me off!”
- “He has done the wrong thing!”
- “Can I get out of it without it costing me any more money?”
- “Can I get my money back?”
- Competition and Consumer Act;
There are many industry partisans who advocate that the sale and purchase of racehorses, and shares in racehorses, should not be subject to regulation, because investment in racehorses is highly speculative and nothing more than a game of chance. When doing so, they ignore, either through ignorance or for convenience, the fact that such transactions and ownership arrangements are subject to numerous laws (both federal and state) which can potentially impact the rights and obligations of the parties, including (without limitation) the following federal and state laws:
- Corporations Act 2001;
- Personal Property Securities Act 2009;
- Insurance Contracts Act 1984; and
- Taxation legislation (GST, income tax and capital gains tax); and
- Sale of Goods Act;
State and territory legislation:
- Partnership Act (Uniform partnership legislation);
- Conveyancing Act 1919 (NSW), Property Law Act 1958 (NSW), and similar legislation in other jurisdictions);
- Civil Liability Act 2002 (NSW), Wrongs Act 1958 (Vic), and similar legislation in other jurisdictions;
some of which have consumer protection provisions embedded within them.
The sense of bravado and enthusiasm that often engulfs the parties and results in the bargain being consummated with a handshake after only a brief discussion (an effective sales pitch), instead of by a written agreement being signed by the parties after appropriate disclosure, due diligence and agreement as to terms, rapidly fades when problems arise causing one or other of the parties, usually the buyer, to review the bargain and consider his or her legal rights and remedies. Only then do they lament the fact that the transaction was not the subject of an appropriate disclosure document and written agreement.
This paper is about the sale of interests/shares in thoroughbred horses for racing purposes (an activity commonly referred to as “syndication”), and the regulatory regime designed to promote and protect market integrity.
I estimate that, in 2018, “ownership opportunities” in racehorses (yearlings and tried horses) with a total cumulative value of more than $40 million will be offered to investors by persons who are, or should be, licensed.
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.
Persons 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.
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 schemesthat 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 be licensed, and the scheme must be registered, subject to specific statutory exemption or ASIC Instrument relief granted administratively by ASIC.
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 carrying on a business dealing in interests in racehorses, as virtually all arrangements [typically partnership, co-ownership or unit trust arrangements] between 2 or more persons (members) 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 persons owning or leasing a racehorse (established by a person who is not carrying on a business dealing in interests) will likely 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 Regulatory Guide 91 (“RG91 ”). If you have not already read RG91  and the ASIC Explanatory Statement, it would be advantageous for you to do so before proceeding to read this paper.
The current ASIC Corporations (Horse Schemes) Instrument 2016/790 commenced on 30/08/2016 [as amended on 16/12/2016] (ASIC Instrument). It replaced:
- ASIC Class Order 02/319 [Horse racing] issued on 15/02/2002 to commence on 11/03/2002 [to coincide with the commencement of the MIS regulatory regime] (as amended) which replaced;
- ASIC Class Order 98/65 [Horse racing] issued on 14/07/1998 which replaced;
- Policy Statement 20 [Horse racing schemes] issued on 04/05/1992.
- is responsible for administering the ARR; and
- has the capacity to investigate and prosecute any person it suspects of breaching the ARR;
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.
The purpose of the ASIC Instrument (as was the case with the previous Class Orders) 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.
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 promoter carrying on a business dealing in shares must be registered as a managed investment scheme, unless it is either:
(a) a personal offer scheme;
(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
Under the Act, any person (promoter) who is carrying on a business dealing in interests in racehorses must hold an appropriate AFS licence authorizing the licensee to provide the services or be an authorized representative of a licensee. This is regardless of whether a specific scheme is eligible for relief from the requirement to be “registered” under statutory exemption, or the terms of any ASIC Instrument. There is no statutory exemption or ASIC Instrument relief from this requirement to be “licensed”.
Any person who establishes a “private” arrangement will not be subject to regulation under the Act. To qualify as a “private” scheme, it must not require registration under section 601ED. [In other words, the scheme must not have more than 20 members and the person promoting the offer must not be in the business of dealing in interests].
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 an 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 moneys 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 moneys 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):
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
(d) 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].
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.
 the Australian Rules of Racing (as amended), as determined by Racing Australia Limited (RA) and adopted and administered by the Principal Racing Authority of each state or territory, together with Local Rules (LR#)