Managed investment schemes explained
The term “managed investment scheme” is often used but not always well understood. You might have come across the term while planning a new business venture which will involve attracting investors and having them contribute funds. Or perhaps you want to provide advice to investors about an investment product and you are not sure whether it is covered by your existing Australian financial services (AFS) licence authorisations.
Either way, it is important to understand whether what you are planning involves a managed investment scheme (MIS), whether it comes within the AFS licensing regime and, if so, whether it must be registered. The outcome of these considerations will determine which regulatory requirements apply to you.
What is a managed investment scheme?
Your business venture or investment opportunity will only be a managed investment scheme if it meets the definition of “managed investment scheme” in the Corporations Act 2001 (Act) (Section 9).
Scheme
The first part of this definition is that there must be a “scheme”. The term “scheme” is not defined in the Act but a number of decisions exist which indicate how the term will be interpreted by the Courts. One well-recognised decision states that the “essence” of a scheme is:
a coherent and defined purpose, in the form of a ‘programme’ or ‘plan of action’, coupled with a series of steps or course of conduct to effectuate the purpose and pursue the programme or plan. (Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 170 FLR 388; 43 ACSR 46; [2002] NSWSC 8343 at [15].)
A good place to look for evidence of a scheme is a constitutive document, such as a trust deed.
Contributions
The second element of the definition that must be met if there is to be a managed investment scheme is that:
people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not).
Working out whether people contribute money is fairly straightforward but money’s worth is a broad concept. Depending on the situation, investors might, for example, contribute traditional investments (such as shares), rights to carbon credits produced by land use, or crypto assets.
In order to satisfy this element of the definition, the money or money’s worth must be contributed in order to acquire rights to benefits produced by the scheme. This invites us to look at the reasons for making the contribution and not at whether the scheme will actually produce benefits or whether the investors will have enforceable rights to those benefits.
Pooling or common enterprise
The next element of the definition is that:
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 people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders).
This element of the definition requires that the production of the benefits be intended to derive from the pooling of the funds (or their use in a common enterprise). Depending on the underlying assets of the scheme (if it has been established that a scheme exists), a plethora of different benefits are possible. One example of a benefit is that investors are able to diversify into areas where they would not otherwise have had sufficient funds to enable them to participate. (Second Reading Speech to the Managed Investment Bill 1997)
No day-to-day control
The next element of the definition is that:
the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions).
By way of example, consider the scenario where all the investors in a trust are also trustees of the trust. In that case, they would retain day-to-day control and the definition of “managed investment scheme” would not be met.
The Act also lists a time-sharing scheme as being a “managed investment scheme”. Further, it lists a number of schemes, funds or activities which are not managed investment schemes.
A unit trust will usually, by its nature, meet the definition of “managed investment scheme”. (This is provided that it does not fall into the list of schemes, funds or activities which are expressly excluded from the definition). However, not all managed investment schemes are unit trusts. In fact, many are not. Notable examples of other types of managed investment schemes are separately managed accounts and limited partnerships.
The simplicity with which we have laid out the features of a managed investment scheme above is deceptive. In practice, there is often significant complexity in determining whether each element of the definition is made out. Whether or not something is a management investment scheme can pivot on a single element and, thus, understanding this complexity is crucial. This is not an area suitable for “DIY”. You will need to obtain legal advice to be sure that the definition of “managed investment scheme” has been applied correctly to your situation.
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For more information, please contact Gavin McInnes on 07 3367 8681 or gmcinnes@grmlaw.com.au.
The information contained in this article is general in nature and cannot be regarded as anything more than general comment. Readers of this article should not act on the basis of this comment without consulting one of GRM LAW 's legal practitioners who will consider their particular circumstances.
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