PS 91 - Horse breeding schemes

ASIC POLICY STATEMENTS
[PS 91.3]
[PS 91]
Policy Statement 91
Horse breeding schemes
Chapter 7
Securities
Issued 3/9/1997
Previous versions: Superseded Policy Statement 91 (superseded 3/9/97)
see ASIC Digest on CD-ROM; Superseded Policy Statement 34 (superseded
22/11/94, see 1994 ASC Digest at SPS 1).
Note: See [PS 136.30] [PS 136.66] for information about how this policy
statement applies to managed investment schemes.
Headnotes
Promotion of horse breeding schemes or syndicates; broodmare schemes or
syndicates; stallion schemes or syndicates; prescribed interests; general
fundraising relief for private broodmare and stallion schemes; conditional
relief for commercial broodmare and stallion schemes from s1064 and 1065
of the Corporations Law; secondary sales; insider trading; disclosing
entities.
Part I: Purpose
[PS 91.1]
This policy statement sets out:
(a)
the ASC’s policy on the syndication of broodmares and stallions and
the regulation of these horse breeding schemes (also known as ‘‘horse
breeding syndicates’’);
(b)
when the ASC will give relief to private stallion and broodmare
schemes from the fundraising provisions of the Law; and
(c)
when the ASC will give relief to commercial stallion and broodmare
schemes from the approved trust deed and trustee provisions and
public corporation provisions of the Law.
[PS 91.2] These horse breeding schemes involve the offer of prescribed
interests, or an invitation to subscribe for or buy a prescribed interest, in the
form of an interest in a horse breeding scheme.
[PS 91.3] In this policy statement references to parts, divisions and
sections are to the Corporations Law (Law) and references to regulations are
to the Corporations Regulations (Regulations), unless otherwise specified.
References to schemes includes syndicates.
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[PS 91.4]
[PS 91.4]
ASIC POLICY STATEMENTS
This policy statement is set out as follows:
Part I
Purpose [PS 91.1]
Part II
Related ASC policies [PS 91.5]
Part III
Types of horse breeding schemes [PS 91.8]
Part IV
The Law [PS 91.18]
Part V
Policy considerations [PS 91.21]
Part VI
Relief for private broodmare schemes [PS 91.24]
Part VII
Relief for private stallion schemes [PS 91.29]
Part VIII
Relief for commercial broodmare and stallion schemes
[PS 91.40]
Part IX
Advertising of horse breeding interests [PS 91.52]
Part X
Secondary trading of unquoted securities [PS 91.55]
Part XI
Securities dealers licence [PS 91.62]
Part XII
Disclosing entities [PS 91.64]
Part XIII
Enquiries [PS 91.66]
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ASIC POLICY STATEMENTS
[PS 91.7]
Part II: Related ASC policies
[PS 91.5] In 1991, the ASC gave an exemption from the fundraising
provisions of the Law for certain horse breeding schemes when the
Australian Bloodstock Exchange Ltd (ABEL) has a role in the scheme: see
Class Order [CO 91/475]. This reflected an exemption granted by the
NCSC. The ASC proposes to review the ABEL exemption in light of this
revised policy.
[PS 91.6] The ASC has issued policies on non-mining primary production
schemes (see Policy Statement 82), disclosing entity provisions (see Policy
Statement 95), secondary trading of unquoted securities (see Policy
Statement 105) and prescribed interest schemes generally: see Policy
Statement 55.
[PS 91.7] If a horse breeding scheme falls outside this policy statement
and the policy statement does not apply to it, Class Order [CO 91/475] or
the policies mentioned in [PS 91.6] may apply to it.
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[PS 91.7]
ASIC POLICY STATEMENTS
Part III: Types of horse breeding schemes
[PS 91.8] A common practice in the horse breeding industry is
syndicating horses for breeding. In a typical horse breeding scheme,
participants share the cost of buying or leasing breeding stock. This cost is
often substantial. This policy statement deals with two types of horse
breeding schemes: broodmare schemes and stallion schemes.
Broodmare schemes
[PS 91.9] Broodmare schemes buy broodmares. The broodmares’ foals
are owned by the scheme and sold through commercial yearling sale
markets. These schemes are sometimes known as ‘‘Thoroughbred
Investment Parcels’’ or ‘‘TIPs’’. Scheme funds are normally used to buy a
number of broodmares, which may be sold later and others purchased.
Scheme participants get any profits from selling foals or broodmares.
[PS 91.10] There is no industry standard for the number of participants in
each scheme. The life of these schemes is not restricted to the breeding life
of a specific mare, unlike stallion schemes, where the life of the scheme is
restricted to the functional life of a particular stallion. However, some
schemes are promoted as fixed-life schemes.
Stallion schemes
[PS 91.11] In a stallion scheme, the asset is a specific stallion whose
identity is known. The promoter tells potential participants the identity of
the stallion at the time of the fundraising. The promoter usually buys or
leases the stallion before the scheme’s fundraising, with the intention of
managing the scheme and having the stallion stand either at the promoter’s
stud or at another nominated stud.
[PS 91.12] The promoter actively markets the scheme and is usually the
standing stud or owner of the stallion being syndicated. In some cases, an
intermediary may market the scheme. The manager manages the day-to-day
activities of the stallion. The manager is normally the stud. The promoter
and manager can be the same entity and may keep a substantial interest in
the scheme.
[PS 91.13] The life of a stallion scheme is limited to the functional life of
the stallion, although the scheme may be wound up sooner.
[PS 91.14] Participants in a stallion scheme get an ownership interest in
the stallion or a right to a specified number of stud services by the stallion.
Usually the promoter issues about 40 ‘‘shares’’ or interests in the scheme.
This is because a stallion is usually capable of providing between 40 and 80
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ASIC POLICY STATEMENTS
[PS 91.17]
stud services per season. Often, additional services may be available for sale
or used by the manager/stud as part of its fee entitlement.
[PS 91.15]
participant:
Participants in a stallion scheme benefit in three ways. Each
(a)
receives the right to one or more stud services per season from the
stallion (a ‘‘nomination’’) for each interest held;
(b)
gets a share of any profit from selling additional stud services; and
(c)
gets a share of any profit made from selling the stallion.
[PS 91.16] Participants in stallion schemes are normally experienced in
horse breeding practices. They may own broodmares and want to use the
stallion’s stud services for their broodmares.
[PS 91.17] Some participants in broodmare and stallion schemes are
attracted by taxation benefits that may be available under tax law.
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[PS 91.17]
ASIC POLICY STATEMENTS
Part IV: The Law
[PS 91.18] Interests in broodmare schemes and stallion schemes promoted
in Australia are prescribed interests, unless they are excluded under the Law
or the Regulations.
[PS 91.19] A person who offers to sell, or invites people to buy, new
prescribed interests must comply with Div 2, 3, 5 and 6 of Pt 7.12 (the
fundraising provisions), except when the offer or invitation is an excluded
offer or invitation such as those in s66.
[PS 91.20] Under the fundraising provisions, a person making an offer or
invitation must:
(a)
be a public corporation (s1064);
(b)
enter into an approved deed and appoint an approved trustee (s1065);
(c)
lodge and register a prospectus which complies with Div 2 of Pt 7.12;
and
(d)
hold a securities dealers licence under Pt 7.3.
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ASIC POLICY STATEMENTS
[PS 91.23]
Part V: Policy considerations
Broodmare and stallion schemes
[PS 91.21] The ASC recognises that the prescribed interest provisions are
so broad that they could apply to private schemes which involve a small
number of participants who are essentially in a private arrangement to breed
horses. These schemes are usually promoted by people who do not
ordinarily promote horse breeding schemes. It is the ASC’s view that these
private broodmare and stallion schemes should not be regulated to any
significant degree. The nature and conditions of relief are described in
[PS 91.24] [PS 91.39].
Commercial broodmare and stallion schemes
[PS 91.22] Commercial broodmare and stallion schemes are set up for a
commercial purpose and, as such, investors should have the benefit of a
prospectus. These schemes usually attract participants who have a personal
interest in the breeding of horses rather than those who are only interested
in the investment potential of the scheme. The ASC considers that because
these investors generally have some understanding of the horse breeding
industry and the associated risks, the cost to promoters and participants of
complying with the public corporation and approved deed requirements of
Pt 7.12 of the Law would outweigh the protection provided by these
provisions. The nature and conditions of relief are described in
[PS 91.40] [PS 91.51].
[PS 91.23] In coming to this conclusion, the ASC has taken into account
that it is an established industry practice for promoters to be natural persons
or proprietary companies. Participants generally have a knowledge of, and
are active within, the industry. Therefore, they can be expected to
understand the industry and what is needed to manage stallion and
broodmare schemes effectively.
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[PS 91.23]
ASIC POLICY STATEMENTS
Part VI: Relief for private broodmare schemes
Relief from fundraising provisions
[PS 91.24] The ASC will give class order relief from the fundraising
provisions of Pt 7.12 to promoters1 of private broodmare schemes and
people selling existing interests in such schemes. They are considered
private schemes because the promoter must make offers personally2 to each
offeree. Under reg 7.3.11, the promoter does not need a securities dealers
licence to deal in these interests.
[PS 91.25] The ASC has given relief by way of Class Order
[CO 97/1136].
The 20/12 rule
[PS 91.26] This relief applies where no more than 20 interests have been
issued or sold by a promoter relating to all horse breeding schemes
promoted by the promoter during a 12 month period regardless of whether
they are for one or more schemes or types of schemes. The 20 issues and
sales in 12 months rule, (or ‘‘20/12’’ rule), also applies to a person who is
not a promoter but is involved in the selling of existing horse breeding
interests.
[PS 91.27] The ‘‘20/12’’ rule relates to the number of horse breeding
interests issued or sold by the promoter or other person regardless of
whether they are for one or more schemes or types of schemes. For a
promoter the rule applies across all schemes being promoted by it (primary
issues) as well as the sale of interests in established schemes (secondary
sales). For example, if a promoter issued 12 interests in a new horse
breeding syndicate (of any type) and eight months later sold three interests
it held in a different but established horse breeding syndicate (again of any
type), this would add up to issuing and selling 15 interests in eight months.
The promoter could not issue any more than five interests in a new private
broodmare syndicate under the private broodmare schemes relief in the
remaining four months. For a person who is not a promoter, the rule applies
to all secondary sales of horse breeding syndicate interests. That is, a
maximum of 20 sales in a 12 month period.
[PS 91.28] The ASC considers that this restriction is consistent with the
approach in s66(2)(d) of the Law, while extending it to apply across all
1
2
8
A person or corporation who makes available or offers for subscription new
interests in a horse breeding syndicate.
Being essentially private offers or invitations that can only be accepted by
the person to whom it is made and that person is likely to be interested in
the offer or invitation.
ASIC POLICY STATEMENTS
[PS 91.28]
horse breeding schemes promoted by the one promoter. Its effect is to
exclude from the general fundraising exemption for private broodmare
schemes, promoters who could be considered as conducting a business of
promoting horse breeding schemes. It also excludes those persons who
regularly deal or trade in horse breeding syndicate interests.
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[PS 91.28]
ASIC POLICY STATEMENTS
Part VII: Relief for private stallion schemes
Conditional relief from fundraising provisions
[PS 91.29] The ASC will give conditional class order relief from the
fundraising provisions of Pt 7.12 to promoters who only occasionally
promote stallion schemes. They are considered to be private schemes
because the promoter must make offers personally3 to each offeree. Under
reg 7.3.11, the promoter does not need a securities dealers licence to deal in
these interests. However, a condition of relief is that the promoter either
holds a dealers licence or at least 10% of all interests in the scheme: see
[PS 91.33].
[PS 91.30] The ASC has given relief by way of Class Order
[CO 97/1138].
The 40/12 rule
[PS 91.31] The relief applies where no more than 40 interests have been
issued or sold by a promoter relating to all horse breeding schemes
promoted by the promoter during a 12 month period. The 40 issues and
sales in 12 months limitation also applies to a person who is not a promoter
but is involved in the selling of existing horse breeding interests. The
extension of the 20/12 rule for private broodmare schemes to 40/12 for
private stallion schemes is necessary as stallion schemes generally are less
likely to be successfully syndicated with a maximum of 20 participants.
[PS 91.32] Reasons for applying the ‘‘40/12’’ rule to all horse breeding
schemes promoted by the promoter are similar to those in
[PS 91.26] [PS 91.28].
Conditions of relief
[PS 91.33]
Relief only applies when:
(a)
the promoter, throughout the duration of the scheme, either holds a
securities dealers licence or at least 10% of all interests in the scheme
(see [PS 91.34]);
(b)
the scheme relates to only one stallion and the stallion stands at stud
in Australia at least for the first three years after it’s syndicated (see
[PS 91.35]);
3
Being essentially private offers or invitations that can only be accepted by
the person to whom it is made and that person is likely to be interested in
the offer or invitation.
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ASIC POLICY STATEMENTS
[PS 91.39]
(c)
participants own the stallion (see [PS 91.36]);
(d)
there is a written syndicate agreement which includes details of
reporting requirements, risk factors and prohibits borrowing by the
scheme to finance the purchase of the stallion (see also [PS 91.37]);
(e)
offers of interests are made personally to prospective participants and
include a copy of the proposed scheme agreement; and
(f)
prospective participants have a three day cooling off period: see
[PS 91.38].
[PS 91.34] The ASC considers that the condition that a promoter either
holds a securities dealers licence or a minimum 10% interest in the scheme
ensures there is some regulatory control over the way interests are marketed
by the promoter or a financial commitment by the promoter to the scheme.
[PS 91.35] In view of the extensive relief from the prospectus provisions
and the significant cost of transporting horses to other countries, the class
order stipulates that the stallion must stand at stud only in Australia for the
first three years of its syndication. This reduces the risk of the scheme
losing some or all control of the stallion during the scheme’s formative
years. The stallion’s worth can be proven to scheme participants over this
time before they decide whether to send the stallion overseas for stud
services. If a promoter wants to send a promising stallion overseas before
the end of the three year period, they should comply with the commercial
stallion schemes class order: see [PS 91.40] [PS 91.51].
[PS 91.36] Although a condition of the class order is that participants
own the whole of the property in the stallion, free of any encumbrances,
breeding rights may still be given to, and held by other people, for example,
trainers and jockeys. These are merely contractual rights to services by the
stallion. These rights do not impinge on the ownership of the stallion.
[PS 91.37] The scheme can not directly borrow to finance the purchase of
the stallion. This limits exposure of new participants to personal liability for
debts when insufficient equity funds are raised to buy the stallion. If a
promoter considers borrowing to help finance the purchase by a syndicate of
a stallion, they should comply with the commercial stallion schemes class
order: [PS 91.40] [PS 91.51].
[PS 91.38] As a prospectus is not needed under the private stallion
schemes class order, the cooling off period of three clear days will give
prospective participants time to consider the merits and risks of the scheme
and to seek advice.
[PS 91.39] The ASC considers these conditions give adequate investor
protection while, at the same time, minimising the cost of establishing
private stallion schemes.
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[PS 91.39]
ASIC POLICY STATEMENTS
Part VIII: Relief for commercial broodmare and stallion
schemes
[PS 91.40] The ASC has given promoters of commercial broodmare and
stallion schemes conditional class order relief from:
(a)
the requirement for an approved deed and an approved trustee (s1065)
and;
(b)
the need to be a public corporation under Pt 7.12 of the Law
(however, there are fundraising restrictions imposed on proprietary
companies which are discussed in [PS 91.44]).
[PS 91.41] The ASC has not given commercial broodmare and stallion
schemes relief from the prospectus requirements of the Law.
[PS 91.42] ASC relief is given by way of Class Order [CO 97/1135] for
commercial broodmare schemes and Class Order [CO 97/1137] for
commercial stallion schemes.
Conditions of relief
Securities dealers licence
[PS 91.43] As a condition of the class orders, the promoter must hold a
securities dealers licence given by the ASC. This ensures some financial
substance of the promoter and a degree of regulatory control over the way
the promoter offers and deals in horse breeding scheme interests. See also
Pt XI Securities dealers licence [PS 91.62] [PS 91.63].
Proprietary companies
[PS 91.44] A promoter must lodge a prospectus with, and have it
registered by, the ASC under Pt 7.12 of the Law: see
[PS 91.50] [PS 91.51] about prospectus requirements. However, s116(4)
states that a proprietary company must not engage in any activity that would
require the lodgment of a prospectus under Pt 7.12. This means that
proprietary companies cannot promote commercial horse breeding schemes.
The ASC does not have the power to give relief from s116(4). Therefore,
promoters of commercial schemes must be either natural persons or public
corporations.
Scheme agreement
[PS 91.45] Commercial broodmare and stallion schemes can only get
class order relief if there is a scheme agreement which deals with:
(a)
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the management of the scheme (whether by way of a management
committee or not) (see [PS 91.47]);
ASIC POLICY STATEMENTS
[PS 91.50]
(b)
removing of the manager of the scheme by special resolution;
(c)
reporting financial information to participants and the ASC (see
[PS 91.49]);
(d)
maintaining a register of participants;
(e)
appointing a registered company auditor to audit the accounts and
mare4 or stallion returns5;
(f)
fees, expenses and insurance; and
(g)
the obligations of the stud.
[PS 91.46] For commercial broodmare schemes, the relief only applies if
the scheme limits the maximum number of broodmares to ten at any one
time and is for an initial maximum term of five years. This is enough time
for the scheme to prove its success. The scheme may continue beyond five
years if participants agree.
[PS 91.47] There is some industry practice of owners of northern
hemisphere stallions not relinquishing complete control of the stallions to
Australian schemes. Therefore, the commercial stallion schemes class order
does not state that a management committee must be established or, if it is
established, for that committee to be made up only of scheme participants.
However, for both broodmare and stallion schemes, the prospectus and the
scheme agreement must fully disclose how the scheme is to be managed.
[PS 91.48] The participants do not have to own the broodmares or the
stallion under the class order relief. Promoters can syndicate leased horses
under the class orders. Stallion breeding rights given to, and held by,
trainers and jockeys, for example, are also not precluded. These are
contractual rights to services by the stallion.
[PS 91.49] The manager of both types of schemes must lodge with the
ASC a copy of annual documents sent to participants. This is to assist the
ASC in monitoring the effectiveness of this policy statement. These
documents are not available for public inspection6. The ASC envisages that
this function could be taken over by a self regulatory industry body should
such a body come about.
Prospectus
[PS 91.50] The promoter of a commercial broodmare or stallion scheme
must prepare and lodge for registration with the ASC a prospectus which
4
5
6
Annual Mare Return Form, foal Identification Certificates and any other
documents required to be lodged with the Keeper of the Australian Stud
Book.
Annual Stallion Return Form, Season Service Date Declaration and any other
documents required to be lodged with the Keeper of the Australian Stud
Book.
The lodged documents should be identified as ASCOT form type 7100.
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[PS 91.50]
ASIC POLICY STATEMENTS
complies with Div 2 of Pt 7.12. Without limiting the scope of s1022, as
modified by reg 7.12.12, for prescribed interests (which requires disclosure
in the prospectus of all information an investor would reasonably need to
make an informed investment decision), the class orders are conditional on
the prospectus having information about:
(a)
the structure of the scheme;
(b)
the total number of ‘‘shares’’ or interests to be created;
(c)
insurance of the horses;
(d)
bloodlines and track performance of the horses and their progeny;
(e)
obligations of participants to contribute further funds to the scheme;
and
(f)
minimum subscription needed before the scheme is considered viable.
[PS 91.51] A copy of the scheme agreement must form part of the
prospectus: see [PS 91.45] [PS 91.49] on scheme agreements.
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ASIC POLICY STATEMENTS
[PS 91.54]
Part IX: Advertising horse breeding interests
Private broodmare and stallion schemes
[PS 91.52] The class orders for private schemes [CO 97/1136] and
[CO 97/1138] give promoters and sellers of interests relief from the
restrictive advertising provisions in s1025 and 1026 and hawking provisions
in Div 6 of Pt 7.12 of the Law. However, the class orders specify that offers
to join a scheme must be made personally by promoters and sellers. This
intentionally prohibits advertising of interests in these schemes. Promoters
who want to advertise offers of new prescribed interests should comply with
the commercial schemes class orders.
[PS 91.53] If participants of private schemes want to advertise the sale of
their interests, they will fall outside of the relief given in the class orders.
Therefore, they must comply with the secondary trading notice provisions of
the Law in Div 3A of Pt 7.12 and the securities hawking provisions of
s1078. See [PS 91.55] [PS 91.61] about secondary trading.
Commercial broodmare and stallion schemes
[PS 91.54] As promoters of commercial broodmare and stallion schemes
are not exempt from Div 2 of Pt 7.12 of the Law (the prospectus
provisions), they may advertise scheme interests offered in the prospectus in
accordance with s1025 and 1026.
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[PS 91.54]
ASIC POLICY STATEMENTS
Part X: Secondary trading of unquoted securities
[PS 91.55] Policy Statement 105 Secondary trading of unquoted
securities explains the provisions of the Law regulating the secondary
trading of unquoted securities and the circumstances where the ASC will
give relief. These provisions are in Div 3A of Pt 7.12 of the Law.
Private broodmare and stallion schemes
[PS 91.56] Class Orders [CO 97/1136] and [CO 97/1138], relating to
private broodmare and stallion schemes, give relief from Div 3A of Pt 7.12.
[PS 91.57] Offers must be made personally by promoters and sellers of
interests in private schemes: see [PS 91.52]. If participants want to advertise
the sale of their interests, they do not get relief under the class orders and
therefore, they must comply with the secondary trading provisions: see
[PS 91.58] [PS 91.60].
Commercial broodmare and stallion schemes
[PS 91.58] The secondary trading provisions apply to participants of
commercial broodmare and stallion schemes who want to sell their interests
in the scheme. Secondary sellers of commercial scheme interests must
prepare and lodge a notice containing all the information required by
s1043C or 1043D of the Law and reg 7.12.08A 7.12.08C.
[PS 91.59] These provisions also apply to participants of private
broodmare and stallion schemes if they want to advertise the sale of their
interests: see [PS 91.52] and [PS 91.57].
[PS 91.60] Sellers of interests in commercial schemes should be aware
that they may be eligible for relief from preparing and lodging s1043C or
1043D secondary trading notices: see Policy Statement 105.
Insider trading
[PS 91.61] The insider trading provisions of Div 2A of Pt 7.11 apply to
secondary trading in unquoted securities. Sellers of interests in any horse
breeding scheme should consider whether they possess any price sensitive
information which is not generally available. If so, the insider trading
provisions prohibit them from selling the interests until the offeree or the
horse breeding industry as a whole becomes aware of that information.
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ASIC POLICY STATEMENTS
[PS 91.63]
Part XI: Securities dealers licence
[PS 91.62] It is a condition of the commercial broodmare and stallion
schemes class orders relief [CO 97/1135] and [CO 97/1137] that promoters
of such schemes hold a dealers licence given by the ASC. The holders of
such a licence must, among other things, comply with all the provisions of
Pt 7.3 relating to participants in the securities industry.
[PS 91.63]
These licences are subject to conditions, including:
(a)
the holder must lodge and maintain an approved security deposit in
favour of the ASC for $10,000;
(b)
the holder must maintain a minimum level of net tangible assets of
$25,000; and
(c)
the licence holder is prohibited from carrying on any securities or
investment advice business under the licence, other than promoting
horse breeding schemes.
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[PS 91.63]
ASIC POLICY STATEMENTS
Part XII: Disclosing entities
[PS 91.64] The enhanced disclosure provisions of the Law may apply to
horse breeding schemes whose interests are not quoted on the Australian
Bloodstock Exchange Ltd. However, in view of the definition of ‘‘ED
securities’’ in Pt 1.2A of the Law, it is unlikely these provisions will apply
to horse breeding schemes except for schemes where a prospectus has been
issued and since the prospectus was issued, at least 100 persons have held
interests in that scheme.
[PS 91.65] Policy Statement 95 Disclosing entity provisions relief
discusses these provisions and any relief available.
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ASIC POLICY STATEMENTS
[PS 91.67]
Part XIII: Enquiries
[PS 91.66] The ASC’s Australian Capital Territory Regional Office is
responsible for administering this policy statement. You should direct all
enquiries about this policy statement to that office on (02) 6250 3800.
Anyone considering relying on relief under this policy statement should get
a copy of the relevant class orders. The class orders show specific details of
the nature of relief and conditions which must be met.
[PS 91.67] A copy of this policy statement and class orders are available
in the ASC Digest or from the ASC’s Infoline on 1300 300 630.
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