Start a managed Fund – The first article in a series about setting up a managed fund in Australia.
Choosing to set up a managed fund in Australia sends a powerful message to the market that you value compliance, transparency and regulatory oversight and are willing to accept the burden that comes with launching, managing and operating a fund in such an environment. Australia is an attractive jurisdiction due to the robust regulatory body, the Australian Investment and Securities Commission.
Questions that consistently arise when talking to managers both here and overseas are – what is the difference in Australia between a registered managed investment scheme vs. an unregistered managed investment scheme and why would one be pursued over the other?
Registered or unregistered
ASIC refers to managed funds as ‘managed investment schemes’ (MIS). Other names commonly used are collective investments or pooled investments. In the US, managed funds are often called mutual funds. There are many types of funds such as hedge, property, private equity and so on. That’s another article but for now, below is a brief explanation of registered vs unregistered.
Registered versus unregistered schemes
Broadly speaking, a MIS allows investors to group together and contribute money to acquire rights to benefits produced by the ’scheme‘. Common schemes include cash management trusts, equity trusts, property trusts and mortgage trusts.
Schemes established and operated in Australia are regulated however, not all schemes are required to be registered. A registered fund has stricter compliance on all levels of operation including mandatory audits.
A scheme must be registered with the Australian Securities and Investments Commission (ASIC) in any of the following situations
- It has more than 20 members.
- It is promoted by a person who is in the business of promoting managed investment schemes.
- ASIC has determined that the scheme, and one or more other schemes, are closely related and the total number of members of the combined schemes exceeds 20.
If none of the above situations apply, then the scheme does not need to be registered. You may still want to, but you don’t have to. Unregistered schemes have some requirements in terms of the interests held, which include, but are not limited to the following:
- Interests in the scheme are offered only to professional investors including those who have been certified by a qualified accountant as having net assets of at least $2.5 million, or gross income for the past 2 years of at least $250,000.
- A member is required to pay at least $500,000 to acquire an interest in the scheme.
- Interests in the scheme are provided for use in connection with a business that has fewer than 100 employees if it is a manufacturing business, or fewer than 20 employees for any other business.
Why managers may choose to launch a registered scheme
One of the primary reasons why a manager would choose to launch a registered scheme is to enable it to be promoted to retail investors or ‘mum and dad’ investors. Some product issuers also register their schemes to demonstrate a commitment to compliance and to provide additional comfort to their investors through a regulated environment.
Apart from the regulatory requirements that determine whether a scheme is to be registered or unregistered, there may be some important commercial issues to consider when making this decision. Some of the most common things to consider include the following:
- Capital raising strategy – It is vital for a manager to have a clear and concise capital raising strategy when considering the nature of the scheme to be launched as if the manager has any plans to attract retail investors, it is essential to register the scheme. However, it is common practice for managers to initially establish an unregistered scheme that can easily be registered when a retail capital raising strategy is implemented. If this is the plan, scheme documentation needs to be carefully drafted. Incorrect drafting or poor decisions can be costly to unwind or modify should the manager wish to change the nature of the scheme at a later date.
- Institutional investor preference – It is important for the manager to understand their target market and investor appetite for registered versus unregistered schemes. Although it is not a legal requirement to establish a registered scheme if the product is only targeted at wholesale investors, many institutional investors may prefer a registered model. Historically, smaller to medium sized institutional investors prefer registered managed investment schemes. The rationale is that the investor feels comfortable investing into a vehicle that is highly regulated in the Australian market and affords a high degree of investor protection.
At the end of it all, the best way to know if you should have a registered or unregistered scheme is to talk to a Responsible Entity willing to give you the time of day. It will save you time and money when choosing a managed Fund.